Regulatory reform for 21st century payments: balancing innovation, inclusion, and security.
The global payments landscape is evolving at unprecedented speed. Technologies such as open APIs, artificial intelligence (AI), digital assets, central bank digital currencies (CBDCs), and efforts to enhance cross-border payments and modernise infrastructure are reshaping how and who moves money.
These innovations promise greater efficiency, inclusion, and competition, but they also expose systemic vulnerabilities and regulatory blind spots.
To unlock the benefits, forward-looking and agile regulatory reform is essential.
But not all regulators are created equal, what works in one jurisdiction might not work in another. In this blog series, Paylume looks at the challenges for modern-day regulators and key considerations as they navigate the future of financial services.
In the second blog of this series, Paylume’s Jimmie Franklin delves into the essential considerations that regulators must address when designing a framework that can support the effective roll-out of a central bank digital currency (CBDC) alongside private innovations such as stablecoins.
The future of money: Designing the dual track
The work being undertaken surrounding CBDCs in the public sector and stablecoins in the private sector has intensified in the last few years.
Around the world, different jurisdictions with a plethora of different economic needs and ambitions have set about creating frameworks that can help initiate what will be the future of money.
Central banks and regulators are not merely referees in the shift toward CBDCs and stablecoins. They are the architects of a new monetary architecture that is rising to prominence on the global stage.
Early issuers of a CBDC had varying degrees of success.
China’s e-CNY has been a methodical, state-led success, evolving from city pilots in 2019 to something well on the way to full integration.
By contrast, Nigeria’s eNaira, which was launched rapidly in 2021 to boost financial inclusion, has struggled with limited public trust and adoption, forcing the central bank to re-examine the project and seek out private-sector partnerships to salvage the initiative.
With stablecoin oversight, the EU has emerged as a pace setter, with the introduction of the Markets in Crypto-Assets Regulation (MiCA) that has established a formal regulatory perimeter for stablecoins, while at the same time, the European Central Bank (ECB) has advanced work on the digital euro.
In parallel, the Bank of England and Financial Conduct Authority (FCA) are now developing rules for stablecoin payments as part of the country’s National Payments Vision alongside the exploration of a potential digital pound that is due to progress significantly this year.
However, it is not the case that Europe is acting in isolation. In Asia, Singapore’s has provided a legal framework for stablecoin issuers, while its CBDC efforts focus on wholesale innovation through initiatives such as its international collaboration with Project Guardian.
Hong Kong, by contrast, is advancing retail experimentation through pilots of the e-HKD and participating in cross-border platforms such as mBridge, while introducing mandatory licensing for stablecoin issuers.
Elsewhere, ambition is equally pronounced. In the Middle East region, the Central Bank of the United Arab Emirates has introduced regulation for Dirham-backed stablecoins and is rolling out a CBDC solution, the Digital Dirham, in phases, which includes cross-border use cases. In Latin America, the Central Bank of Brazil is integrating stablecoins into its foreign exchange regulatory framework while developing Drex as a programmable platform designed to support smart-contract-enabled financial .
A well-thought-out design
The central challenge for authorities is designing a coherent dual-track framework in which CBDCs and stablecoins can co-exist. This requires addressing the pain points that justify the need for a CBDC, especially in markets where private-sector solutions such as stablecoins, instant payment rails, or traditional card schemes already function effectively.
CBDCs need to provide a sovereign monetary mechanism, while stablecoins operate as an innovation layer.
This delineation requires clear role definition, aligned prudential treatment of reserves, well thought-out interoperability standards, and CBDC designs that complement rather than crowd-out bank funding.
Whether the central bank is better positioned than the private market to solve these sorts of issues must be taken into account and the CBDC design should be pain-point-driven, rather than motivated by technological transformation.
The calibration is delicate. An overly permissive stablecoin framework risks monetary fragmentation, but excessive regulation could push innovation offshore. An overly attractive CBDC meanwhile could disintermediate commercial banks.
However, if balanced correctly, central banks can create a framework that preserves monetary sovereignty, keeps innovation onshore, and gives countries respect as international standard-setters, in a similar way to how Europe has emerged with open banking, or Brazil and India have with payments innovation.
The financial stability question
Financial stability is another critical consideration that central banks and regulators must take seriously. Digital money fundamentally increases the speed at which liquidity can move. If consumers can instantly transfer deposits into CBDC wallets or fully‑reserved stablecoins, stress events could accelerate, heightening the risk of rapid bank disintermediation as deposits flee the traditional banking system.
These dynamics require policymakers to think carefully about how digital money interacts with existing funding structures, particularly during periods of volatility.
This concern has been one of the key drivers behind the development of legal and regulatory frameworks worldwide. The EU, for example, intensified its work on the digital euro and stablecoin regulation after the 2019 emergence of Meta’s (then Facebook’s) Libra proposal, which underscored how quickly private digital money could scale and challenge monetary sovereignty.
But regulatory calibration is not only about containing risks. International experience shows that the design choices behind a CBDC, as well as how it integrates with the private sector, meaningfully influence adoption, stability, and market structure.
China’s e‑CNY offers an important case study in aligning state objectives with commercial incentives.
Rather than building a competing infrastructure, Chinese authorities embedded the digital currency directly into dominant private‑sector payment ecosystems such as Alipay and WeChat Pay.
This cooperative design reduces disintermediation risk, maintains the primacy of commercial banks in customer engagement, and incentivises adoption.
Nigeria’s eNaira, by contrast, illustrates the adoption challenges that arise when underlying currency confidence is weak.
High inflation, currency devaluation, and limited purchasing power mean citizens have gravitated toward dollar‑backed stablecoins as alternative stores of value. This weakens the appeal of a sovereign digital currency unless it can offer clear utility, stability, and trust advantages over private options. Without these, a CBDC risks low adoption, limiting its usefulness as a policy tool and offering little protection against capital flight into foreign‑denominated digital money.
These contrasting examples show central banks need to balance stability with market incentives when designing CBDCs. Clear rules on holding caps, remuneration, and reserves are essential, and delivering this demands new supervisory capabilities and sustained collaboration with financial services.
The role of the private sector
Effective public-private collaboration is essential rather than optional should a CBDC be a success. In the UK and EU, retail CBDCs are likely to follow an intermediary model in which banks and payment service providers distribute wallets, manage customer interfaces, and embed digital money into existing financial services.
For this to work, regulators must incentivise participation, and it is imperative to bring the private sector on this journey. They need to clarify the capital treatment of tokenised deposits and align CBDC infrastructure with existing payment rails.
CBDCs raise concerns because they blur the boundary between public monetary infrastructure and private financial services, creating uncertainty about future competition. Much depends on design. In the case of the proposed digital euro, a strictly intermediated model with holding caps could reinforce the private sector role, but features such as direct retail access or attractive remuneration might displace deposits and dampen private investment. The ECB’s development of TIPS as public instant payment infrastructure already illustrates how state-backed rails can reshape market dynamics. Clear commitments are essential to ensure public platforms complement, rather than inadvertently undercut, the private sector.
Without meaningful private-sector integration, CBDCs risk becoming technically sound but commercially marginal, and the risk is political and structural: central banks perceived as retail competitors or drawn into debates over deposit flight and credit allocation.
Managed carefully, however, collaboration can reinforce the traditional two-tier system, with central banks providing neutral core infrastructure while private institutions innovate at the edge.
The importance of this partnership model is already visible in ongoing work. The ECB is developing the digital euro with more than 70 private-sector participants using its Innovation Platform, including firms such as Amazon, Worldline, Nexi and CaixaBank.
The Bank of England’s CBDC Engagement Forum includes a variety of industry participants, including NatWest, Visa, and PayPal, while Brazil’s Drex has engaged with industry participants such as Santander, Visa, Mastercard, and Google, as well as local financial service providers.
The cross-border conundrum
CBDCs and stablecoin frameworks are being developed on a country-by-country basis, considering the needs of different jurisdictions. However, cross-border coordination remains fundamental.
Divergence creates significant risk. To address this, international bodies such as the Financial Stability Board (FSB), IOSCO, the G7, and the G20 are increasingly shaping cross-border standards, especially on stablecoins, while the BIS has strived to instil central bank cooperation regarding CBDCs.
Equivalence regimes, coordinated standards, and interoperable designs will be necessary to avoid regulatory arbitrage, prevent fragmented liquidity pools, and maintain market confidence.
By embracing a rules-based, cooperative approach, regulators can manage systemic risk while enabling innovation in cross-border transactions.
Getting the dual track right
Ultimately, the dual-track world of CBDCs and regulated stablecoins is a stress test for institutional adaptability. The risks, whether that be disintermediation, faster contagion, fragmentation, or political backlash, are real.
However, so are the strategic gains such as modernised monetary infrastructure, enhanced supervisory tools, payments sovereignty, and stronger geopolitical positioning. If carefully calibrated, these reforms can reinforce, rather than diminish, central bank authority in the digital age.
Stay tuned for our third blog next week.
