Central Bank Digital Currencies and Consumer Acceptance

In early March, the president of the United States signed an executive order instructing different agencies to study the development of a framework to regulate digital assets, i.e., all types of digitally issued financial assets and instruments used for payments and investments (Executive Order on Ensuring Responsible Development of Digital Assets, 2022). The White House stated that the project also asks for a detailed plan for the possible launch of a digital version of the dollar, a so-called “Central Bank Digital Currency” (CBDC). 

The United States is one of the latest countries to formally announce a policy considering the eventual adoption of a digital form of national currency. According to the executive order’s fact sheet, over a hundred countries are currently examining the emission of these types of digital forms of money. This statistic reveals that governments are paying more attention to emerging digital technologies. It also reflects how Central Banks are taking a more proactive approach to digitization challenges and technological disruption in the payments systems, sparking a debate about issuing a CBDC. The Bank of International Settlements (2020) defines such an instrument as a broadly available general-purpose digital payment instrument denominated in the jurisdiction’s unit of account and direct liability of its monetary authority.

While the reasons for considering CBDCs emissions vary by country, it seems that regulatory authorities are trying to keep up with technological advancements in the payments space. Countries embarking on these plans would have to consider the implications of an economy where all transactions would be done with a currency that would not physically exist. However, to what extent do consumers’ perceptions and preferences for a digital form of currency play into the authorities” plans? The plans aim not simply to substitute cash but to essentially redefine how citizens interact in the economy, particularly while making payments. Although several Central Banks’ approaches to digital currencies remain elusive and are unlikely to be fully realized in the short term, these ideas could drastically change the way consumers make payment transactions.

According to Auer et al. (2021), four main global trends have driven the exploration of CBDCs’ launchings:

(i) The rise of cryptocurrencies (most notably Bitcoin) has attracted the attention of various industries. However, they seem to pose risks to the general public due to volatility episodes and a lack of regulation.

(ii) The development of private-sector alternatives such as stablecoins—a type of cryptocurrency whose value is guaranteed by physical assets. They are generally pegged to traditional currencies to make them less volatile and more accepted. However, most of them are still in the testing phases and are not ready for mass adoption.

(iii) The entry of big technology firms into the financial services sector—such companies’ competitive advantages in terms of economic, technological, and data resources position them as serious disruptors if they decide to launch payment method alternatives.

(iv) In many countries, the COVID-19 pandemic has accelerated the adoption of digital payments even though some developed countries had already started down this road before the pandemic.

It is open to question to what extent these concerns are genuinely driving contemporary CBDC research and the race for its development or whether they are part of the “background noise” around the novelty of the topic. Moreover, the concern about being left behind by regulatory peers in examining a proposal in the payment space could also be an additional motivation for considering a digital representation of national currencies. In any case, the CBDCs have emerged as the primary policy response from the Central Banks to such considerations.

More fundamental is that Central Banks will face a public acceptance problem if they decide to issue a new digital form of public money. It would require people to use it for daily transactions instead of other existing payment alternatives. According to Bijlsma et al. (2021), the public’s preferences regarding using a new digital currency for payments are relevant for massive adoption. Some authorities, like the Bank of Canada, have recognized this fundamental issue by publicly stating that a decision to launch a CBDC would require the full acceptance by the Canadian public. Bank of Canada (2020). 

On the other hand, financial decisions are frequently complicated, including those related to the election of payment instruments. For that reason, individuals tend to rely on heuristics to simplify their choices. Kahneman and Tversky (1979) explain that such behaviors are due to cognitive biases. It is important to consider that these biases are frequently due to multiple possibilities. In the case of the payments space, given the existence of several alternatives, consumers’ elections could reflect different types of biases, namely, status quo bias, framing effects, loss aversion, sunk costs, or others.

Central Banks could help overcome some of those biases by implementing behavioral interventions in choice architecture to make CBDCs adoption easier. Moreover, in the spirit of Thaler and Sunstein’s (2003) libertarian paternalism idea applied to central banking policy, the nudging around using a digital form of the national currency may produce welfare effects. In theory, CBDCs will provide users with benefits such as real-time money transfers and payments with minimal to no fees, faster receipt of direct economic stimulus payments, and programmability to target stimulus to distressed groups.

Therefore, Central Banks’ choice architects could apply behavioral tools to motivate CBDCs’ acceptance, like using defaults or creating incentives (Thaler et al., 2010). Notably, defaults have proved to have a significant effect in the presence of numerous and complex alternatives. In the payment space, users can access a broad range of digital methods like electronic transfers, contactless/digital debit and credit cards, internet and mobile payments, cryptocurrencies, etc.

Following Srinivas et al. (2016), defaults are extensively used for digital transactions. For example, private companies employ default payments in online shopping, mobile apps, and electronic wallets at their physical point-of-sale terminals. In that sense, Central Banks could design CBDCs as the “top-of-the-wallet” payment option, knowing that most individuals will choose the effortless alternative (Thaler et al., 2010). This may be an effective way to reduce transaction frictions while increasing CBDC adoption. However, for this implementation to be possible, it would be necessary to reach agreements with financial institutions and the private sector to set the digital currency as the default option when displaying the different payment options to users. This idea could be achievable under an “indirect CBDC model” (Auer and Bohme, 2021). In that model, Central Banks issue the digital currency through a network of private intermediaries to back claims on CBDCs, and the third-party intermediaries would have an account with the Central Bank.

Some authorities have noticed a significant decline in cash payments for day-to-day operations compared to digital means (Bank of Canada, 2020), which may enable the implementation of the described choice design. One factor contributing to the decreasing usage of cash could be attributed to consumers’ paying experiences, particularly the pain of paying with cash, i.e., the negative feelings that arise from letting go of physical money to make payments in the economy (Prelec & Loewenstein, 1998; Soman, 2003). Moreover, according to Sarofim et al. (2020), transparency is a function of the salience physical representation of money, the more transparent the payment mode, the more consumers experience the pain of paying. However, what is unclear is the effects on users’ perceptions of transparency of digital payments (Soman 2003). If a CBDC is perceived as a transparently digital representation of money, it might produce the same painful experience for users as its physical counterpart, and therefore its usage would be limited.

However, a downside implication of this choice design is that it implies that Central Banks would provide all payment services and take full responsibility for CBDC’s account administration. Consequently, their responsibilities will increase, overloading their current capacities. This scenario could result from a miscalibration of Central Banks’ involvement in the payment systems. Likewise, it could also reflect over-optimism in a CBDC project and the delusional optimism of managers inside Central Institutes (Lovallo and Kahneman, 2003; Ordoñez et al., 2009). In that regard, Koning (2021) has stated the irrelevance of a new digital payment method in the markets. He argues that existing processes or institutions can already achieve everything a CBDC would improve.

While the above scenario is a reality for users in advanced economies, consumers in developing countries still rely heavily on cash for daily operations. One of the main reasons is the high degree of anonymity that physical money has over digital instruments. This issue is critical because Central Banks would control the emission of the CBDCs and could potentially track all transactions in the economy. Although with this feature, Central Banks will have a new monetary policy tool that would significantly shorten the time it takes for money to reach the economy (Copic and Franke, 2020), giving them the ability to track flows through the economy, which could aid in designing specific policy programs. However, this feature might raise surveillance concerns, especially in countries with low trust in public institutions (Kiff and Gross, 2021). Therefore, Central Banks in developing countries would face a choice design trade-off between satisfying user preferences for privacy and accessing transaction data for targeting and programmability. 

One possible option is to follow the Bank of Canada’s (2020) proposal to frame CBDCs as “enhanced cash.” The aim is to highlight salient features like security and technological advantages like accessibility, transparency, and a high level of privacy. However, this strategy might not be effective in developing countries, given that people value anonymity and privacy in payment transactions. Moreover, consumers generally care about online privacy in the digital space, and they act on that concern (Brandimarte & Loewenstein, 2020). The fact that CBDCs are considered an electronic payment technology solution may influence users’ perceptions of the privacy they provide. In other words, framing CBDCs as privacy-preserving could not necessarily be effective due to users’ preconceptions of the traceable nature of electronic payments. 

Central bankers’ choice architects, on the other hand, could use specific incentives to highlight key features of this new digital currency. Using end-to-end encryption methods on low-value transactions, for example, allows for more privacy. Other incentives could include point rewards, discounts on certain transactions, referral code promotions, increasing the private transaction limits based on CBDC usage, and so on (Kiff and Gross, 2021).

Introducing a new digital form of the national currency will be a significant challenge for Central Banks in the coming years. Traditionally, such central institutions oversee the provision of money to the economy, so small design choices in the issuance could have substantial consequences for consumers. But most importantly, whether beneficial or detrimental, the emergence of CBDCs has far-reaching implications for many aspects of the global financial system.

A massive adoption of a digital version of money would have profound implications for how the economy is conducted and its functioning. After all, as the Federal Reserve (2022) states, for a nation’s economy to function effectively, its citizens must have confidence in its money and payment services. That said, CBDCs will only succeed if they can prove to be a better alternative to existing instruments that perform similar functions. Unfortunately, none of the significant CBDCs’ proposals have been tested on a large scale in the real world. As a result, there are still a lot of unanswered questions, including technological designs, interoperability, and the behavioral attitudes of end-users. For these reasons, regulatory authorities need to consider society’s acceptance of the potential use of new technology in the final design of a CBDC.

“Central Bank Digital Currencies - foundational principles and core features” Bank for International Settlements. Accessed December 9, 2021. https://www.bis.org/publ/othp33.pdf 

“Contingency Planning for a Central Bank Digital Currency.” Bank of Canada. Accessed December 9, 2021. https://www.bankofcanada.ca/2020/02/contingency-planning-central-bank-digital-currency/#2-Public-policy-considerations 

Acquisti, A., Brandimarte, L., & Loewenstein, G. (2020). Secrets and likes: the drive for privacy and the difficulty of achieving it in the digital age. Journal of Consumer Psychology, 30(4), 736-758.

Auer, R., & Boehme, R. (2021). Central bank digital currency: the quest for minimally invasive technology (No. 948). Bank for International Settlements.

Auer, R., Frost, J., Gambacorta, L., Monnet, C., Rice, T., & Shin, H. S. (2021). Central bank digital currencies: motives, economic implications and the research frontier. Annual Review of Economics, forthcoming.

Auer, Raphael A., Giulio Cornelli, and Jon Frost. Rise of the central bank digital currencies: drivers, approaches and technologies. No. 8655. CESifo Working Paper, 2020.

Bijlsma, Michiel, Carin van der Cruijsen, Nicole Jonker, and Jelmer Reijerink. "What triggers consumer adoption of CBDC?." (2021).

Copic, E., & Franke, M. (2020). Influencing the Velocity of Central Bank Digital Currencies. Available at SSRN 3518736.

Gross, Jonas, Kiff John. “CBDCs for the People? Where the Current State of Digital Currency Research Leads.” CoinDesk, December 3, 2021. https://www.coindesk.com/policy/2021/12/03/cbdcs-for-the-people-where-the-current-state-of-digital-currency-research-leads/ 

Executive Order on Ensuring Responsible Development of Digital Assets. (2022, March 9). The White House. https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/ 

FACT SHEET: President Biden to Sign Executive Order on Ensuring Responsible Development of Digital Assets. (2022, March 9). The White House. https://www.whitehouse.gov/briefing-room/statements-releases/2022/03/09/fact-sheet-president-biden-to-sign-executive-order-on-ensuring-responsible-innovation-in-digital-assets/ 

Jiang, Janet Hua. CBDC adoption and usage: some insights from field and laboratory experiments. No. 2020-12. Bank of Canada, 2020.

Kahneman, Daniel, and Amos Tversky. “On the interpretation of intuitive probability: A reply to Jonathan Cohen.” (1979).

Koning, J.P. “To CBDC or Not to CBDC?” AIER. American Institute for Economic Research, July 5, 2021. https://www.aier.org/article/to-cbdc-or-not-to-cbdc/ 

Lovallo, Dan, and Daniel Kahneman. “Delusions of Success: How Optimism Undermines Executives’ Decisions.” Harvard Business Review 81, no. 7 (2003): 1-10.

National Audit Office [NAO]. “Over-Optimism in Government Projects.” (2013).

Ordóñez, Lisa D., Maurice E. Schweitzer, Adam D. Galinsky, and Max H. Bazerman. “Goals gone wild: The systematic side effects of overprescribing goal setting.” Academy of Management Perspectives 23, no. 1 (2009): 6-16.

Prelec, D., & Loewenstein, G. (1998). The red and the black: Mental accounting of savings and debt. Marketing Science, 17(1), 4-28.

Sarofim, S., Chatterjee, P., & Rose, R. (2020). When store credit cards hurt retailers: The differential effect of paying credit card dues on consumers’ purchasing behavior. Journal of Business Research, 107, 290-301.

Soman, D. (2003). The effect of payment transparency on consumption: Quasi-experiments from the field. Marketing Letters, 14(3), 173-183.

Thaler, R. H., C. R. Sunstein, and J. P. Balz. “Choice Architecture (SSRN Scholarly Paper No. ID 1583509).” Rochester, NY: Social Science Research Network (2010).

Thaler, Richard H., and Cass R. Sunstein. "93 Am Econ Rev." Libertarian Paternalism 175 (2003): 175-179.

The Fed - Money and Payments: The U.S. Dollar in the Age of Digital Transformation. (2022). Board of Governors of the Federal Reserve System. https://www.federalreserve.gov/publications/money-and-payments-discussion-paper.htm 

Waller, Christopher J. “Central bank digital currency: A solution in search of a problem?.” Central Bank Digital Currency Considerations, Projects, Outlook (2021).

Rafael Morales Guzman is a current Ph.D. student at JSGS. He is also a Cornell Institute for Public Affairs (CIPA) alumnus, earning an MPA in 2015 with a focus on International Development Studies. He holds a BA in Economics and a BA in Political Science from ITAM (Mexico). He has worked for more than ten years for the Central Bank of Mexico in areas related to financial system analysis. He is actively involved in monitoring the development and evolution of the FinTech sector. He has also presented on the topic in national and international forums on this subject, such as at the Central Bank of France, the Central Bank of Argentina, the Interactive Museum of Economics, and the Monterrey Institute of Technology and Higher Education (ITESM).

His primary research interests are at the intersection of policy and innovation technology, and his broader research interests lie in financial development, regulatory policy, and political economy.