In a recent episode of Ripple’s YouTube series “Crypto in One Minute,” James Wallis, VP of Central Bank Engagements, shared his expertise on how Central Bank Digital Currencies (CBDCs) could be instrumental in fostering financial inclusion across the globe.
CBDCs, or Central Bank Digital Currencies, are a digital form of a country’s fiat currency, issued and regulated by the nation’s central bank. They represent a new chapter in the evolution of money, combining the traditional reliability and regulatory oversight of central bank currencies with the technological advantages of digital systems. Here’s a breakdown of their key characteristics:
- Digital Form of Fiat Currency: Unlike cryptocurrencies like Bitcoin, which are decentralized and not tied to any specific country, CBDCs are the digital equivalent of a nation’s physical currency (like dollars, euros, or yen). They hold the same value as their physical counterparts and are interchangeable with them.
- Central Bank Issued and Regulated: CBDCs are issued and controlled by a country’s central bank, which is responsible for monetary policy and financial stability. This central authority distinguishes CBDCs from decentralized digital currencies.
- Aims to Modernize Financial Systems: The introduction of CBDCs is often seen as an effort to modernize the financial system, making it more efficient, faster, and more secure. They can potentially streamline payment systems, reduce transaction costs, and increase transaction speeds.
- Potential for Financial Inclusion: CBDCs could play a role in increasing financial inclusion, especially in underbanked or unbanked areas, by providing easier access to digital payments and financial services through mobile technology.
- Different Types: There are two main types of CBDCs – retail and wholesale. Retail CBDCs are designed for public use, similar to physical cash, while wholesale CBDCs are restricted to financial institutions for interbank payments and financial settlements.
- Privacy and Security Concerns: The implementation of CBDCs raises questions about privacy, as they allow central banks to track financial transactions more easily. Ensuring the security of these digital currencies against cyber threats is also a critical concern.
- Impact on Monetary Policy: CBDCs could offer new tools for central banks in implementing monetary policy, potentially allowing for more direct mechanisms of influencing the economy, such as programmable money or targeted financial interventions.
- Global Interest and Development: Many countries are exploring or actively developing CBDCs, with China’s digital yuan and the Bahamas’ Sand Dollar among the early examples. The European Central Bank and the Federal Reserve are also researching the potential of digital euros and dollars, respectively.
Before assuming his current position at Ripple, Wallis was the Vice President of Global Sales Strategy & Operations at the company, a role he held from May 2019 to January 2021. In addition to his duties at Ripple, in August 2018, Wallis established 7e4 LLC, a consultancy specializing in strategic advice and business consulting, particularly in blockchain, fintech, and Payments & Transaction Banking sectors.
Wallis’s professional journey includes a significant 17-year stint at IBM prior to joining Ripple. He played a pivotal role in initiating IBM’s Blockchain division, managing its worldwide sales and operations from January 2015 until July 2018. He also served as the Vice President for the Global Payments Industry at IBM from January 2008 to June 2017. In this capacity, he managed a business segment in the payments industry worth several billion dollars. His diverse leadership roles at IBM covered various domains, including corporate development, software sales, and global sales operations.
Here’s a detailed breakdown of Wallis’s insights:
- Defining Financial Inclusion: Wallis began by explaining the concept of financial inclusion. He stated that it refers to the lack of access to financial services experienced by people globally, from various regions including the US, Africa, and Asia. This lack of access, according to Wallis, is primarily due to two reasons: low income leading to no established relationships with financial institutions and hence no credit history, and the profit-driven nature of banks which makes it hard to serve those with little to no money.
- CBDCs as a Solution: Wallis highlighted the potential of CBDCs in solving these issues. He pointed out that CBDCs are much lower in cost, which can allow financial services to be provided at a much lower cost basis than what is currently available. This cost-effectiveness is key to making financial services accessible to those who are currently excluded.
- Enabling Basic Financial Services: Further, Wallis emphasized that CBDCs could enable people to access simple payment opportunities. This access is crucial as it can help people start to build a credit history.
- Opportunities for Business Growth: Wallis also mentioned that through CBDCs, individuals could have the opportunity to borrow money, which could be pivotal in helping them grow their businesses.
- Concluding Remarks: In his closing remarks, Wallis acknowledged the breadth of the topic and the challenge of condensing years of discussion into a minute. He expressed his enthusiasm for the subject and its potential impact but noted the time constraint of the format.