Evaluating the Effects of the Payment Ecosystem on Central Bank Digital Currency Adoption and Design

Abstract

Central Bank Digital Currency (CBDC) has become a dominant discussion topic with worldwide economics and societal relevance. There is a growing body of research on CBDCs adoption drivers, with payment system efficiency on top. This study identifies a gap in the literature on the unexplored evaluation of the payment ecosystem’s impact on retail CBDC adoption and design. The work outlines distinctive features, benefits, and risks along with adoption status around the world and parties involved. The research develops a theoretical model based on previous literature and economic theories involving both normative and behavioral constructs. The scientific methodology is used to quantitatively test the hypotheses on a sample of 65 countries and secondary data mainly from the World Bank. The analysis is grounded on a path model with OLS and limited dependent variables regressions techniques. Results are in line with the theoretical structure, though with some exceptions. CBDC adoption is driven by differences in payment ecosystem characteristics, with payment alternatives in the first place. For the first two research questions measuring the impact of payment alternatives and preferences respectively, CBDC adoption results positively associated with fintech and electronic money usage, perceived safety, and infrastructures. This may signal the importance of familiarity with digital payment methods from users, trust in authorities and structural capabilities supporting CBDCs. Adoption is also inversely related - to a lesser extent - to presence and quality of alternatives that may dampen the perceived need for the instrument. The last research question on the payment ecosystem effect on CBDC evidences how difficulties in accessing financial services increase the likelihood of choosing a token-based access. Transactions volume and trust in authorities are directly linked with the choice of a central database as opposed to a DLT infrastructure. Deviations from the proposed theory occur from unclear effects of cash and cryptocurrency usage on CBDC adoption and unexpected results from industry concentration, architectural and interlinkages features. The work concludes by suggesting a sub-sample of countries that under the model proposed are in line with CBDC adoption, predominantly the United Kingdom and China. The findings provide policymakers with further elements to evaluate the CBDC business case given selected countries’ characteristics, academics with a theoretical basis for further research in the area, and businesses with an overview of opportunities from CBDCs.