How rCBDC Gets Done: Why Learning by Simulation is Critical for rCBDC Projects
By José Fernando Moreno Gutiérrez
Recently, I had the opportunity to read the book “How Big Things Get Done” by Prof. Bent Flyvbjerg and Dan Gardner, which was recommended to me by our company President, Phillip Straley. I was struck by how many concepts from the book aligned with FNA’s approach to its retail central bank digital currency (rCBDC) simulator. In this blog post, we will explore how our rCBDC simulator aligns with key principles outlined in the book.
How Big Things Get Done
In “How Big Things Get Done,” Prof Bent Flyvbjerg and Dan Gardner provide a comprehensive framework for successfully managing and executing large-scale projects. The book highlights the importance of simulation and modelling as essential tools to identify potential risks, challenges, and opportunities.
A notable example presented in the book is the approach Pixar Animation Studios and the famous architect Frank Gehry took. Both demonstrate the benefits of simulation and modelling to refine and optimise ideas. By testing various storylines, characters, and scenes before production, Pixar can ensure its final products are of the highest quality. Similarly, Gehry’s use of advanced computer simulations allowed him to identify potential structural challenges and make adjustments, resulting in the creation of the acclaimed Guggenheim Museum Bilbao.
Another highlight from the book is the importance of Lego modularity for executing large-scale projects successfully. By breaking down complex projects into smaller, more manageable components, project teams can focus on specific tasks and deliverables, leading to streamlined construction, reduced costs, and timely project completion. The Madrid Metro is an excellent example of this approach, where the project team divided the construction and expansion of the metro system into self-contained modules representing specific sections of the metro network.
According to the book, to increase the chances of success, gathering individuals who possess the required skills and can collaborate effectively is necessary. The Sydney Opera House is a cautionary example of the negative consequences of not prioritising expertise during the project planning stage. The project experienced significant delays, cost overruns, and other issues, primarily due to the selection of inexperienced professionals who needed to gain the necessary skills to handle such a complex endeavour.
rCBDC is a Big Deal
It is well-known that a rCBDC rollout is a significant undertaking. The implementation of a rCBDC is a considerable development in the world of finance, and central banks worldwide are taking a serious approach to its deployment. rCBDC can bring many benefits, including increased financial inclusion, enhanced monetary sovereignty, improved payment systems, and reduced costs associated with cash management. However, it also poses significant challenges, including cybersecurity risks, privacy concerns, and the need for new regulatory frameworks. Therefore, implementing rCBDC requires careful planning, risk mitigation, and a deep understanding of the unique challenges faced by each jurisdiction.
Because of the above, Prof Flyvbjerg and Gardner’s approach to simulation and modelling can be instrumental in helping central banks optimise their digital currency initiatives and minimise potential risks. Simulation and modelling can provide insights into how the rCBDC system will function in the real world, identify potential bottlenecks and vulnerabilities, and allow central banks to test different scenarios and fine-tune the system before launch. Moreover, simulation and modelling can help central banks estimate the costs and benefits of rCBDC deployment and assess its impact on the payment ecosystem.
FNA’s rCBDC Simulator
The use of simulation, modelling and ‘digital twins’ are becoming increasingly common across various industries, including engineering, finance, and healthcare, as it can help prevent costly mistakes and ensure the best possible outcomes. FNA has developed a state-of-the-art rCBDC simulator that allows central banks and market participants to learn from simulation as a powerful complement to learning by doing. The FNA rCBDC simulator uses Agent-Based Modelling (ABM) to enable clients to generate maximum virtual products (another interesting concept from the book) and test all feasible scenarios.
FNA’s rCBDC Simulation solution is a comprehensive tool designed to enable central banks, commercial banks, payment system providers, and other stakeholders to test, model, and simulate the adoption of rCBDC and their impact on the payment ecosystem. By utilising ABM, the solution effectively models the retail payment system of an economy, incorporating various types of heterogeneous agents that interact and adapt as a consequence of consumers and merchants using multiple payment instruments for transferring funds or paying for goods and services.
The ABM model, which serves as the core of FNA’s rCBDC Simulation solution, consists of agents interacting and adapting through transactions using payment instruments. These transactions lead to changes in the balance sheets of each agent, affecting their assets or liabilities accounts. We designed the framework around building blocks: agents, accounts, transactions and payments, money and payment instruments, including rCBDC wallets. Agents’ features, behavioural rules, interactions, and adaptation and learning capabilities determine their current and updated behaviour, allowing for a dynamic and evolving representation of the payments ecosystem.
The FNA rCBDC simulator also incorporates the Lego modularity approach mentioned in the book, allowing clients to select and modify individual modules to address their specific needs. In particular, the solution is highly adaptable and can be easily extended and changed by designing new modules that interconnect with the building blocks. This flexibility enables the simulator to adapt to various jurisdictions and client concerns, making it a powerful tool for central banks and market participants.
Ultimately, the rCBDC Simulation solution provides stakeholders with valuable insights to assess the impact of rCBDC adoption, evaluate potential risks and benefits, and make informed decisions related to rCBDC issuance, distribution, and implementation.
Learning by Simulation
The FNA rCBDC simulator represents a novel approach to the design and implementation of central bank digital currencies by incorporating the valuable process of learning from simulation alongside learning by doing (e.g. from pilots). By offering a virtual environment for testing and exploration, this innovative simulator empowers stakeholders to understand better the complexities surrounding rCBDC and make better-informed decisions during the implementation phase.
One of the primary benefits of using the FNA rCBDC simulator is the ability to conduct a wide range of scenario analyses. With this tool, central banks, policymakers, and other stakeholders can simulate diverse economic conditions and regulatory environments to evaluate the potential impact of their decisions on the CBDC system. By exploring various scenarios, they can identify and assess potential risks, uncover unforeseen challenges, and gain insight into the best strategies for mitigating these issues. This proactive approach allows for designing a more robust and resilient rCBDC.
Another advantage of combining learning from simulation with learning by doing is the opportunity for iterative improvement. As the rCBDC project progresses, stakeholders can continually refine their strategies and designs by comparing simulated outcomes with real-world experiences. This feedback loop enables them to make data-driven decisions, optimise system performance, and ensure that the rCBDC system evolves in line with the market’s changing needs and regulatory landscape.
Furthermore, the FNA rCBDC simulator can provide valuable insights into the potential interactions between the rCBDC system and existing financial markets. By simulating the behaviour of market participants, the solution can help identify any potential areas of friction or inefficiency that may arise when introducing a digital currency.
FNA Expertise
At FNA, we pride ourselves on being an authority in analysing complex financial networks, offering valuable insights and tailored solutions to central banks, financial institutions, and regulators worldwide. Our multidisciplinary team of experts in network science, computer science, economics, and finance enables us to tackle the most pressing challenges the financial industry faces. Our expertise in simulating payment systems and CBDCs allows us to provide innovative solutions for managing risks, identifying vulnerabilities, and optimising the performance of financial systems.
By partnering with FNA, you can benefit from our unique expertise and contribute to building a more stable and resilient financial landscape, ensuring the smooth functioning of the global economy.
Simulation is Critical for Successful rCBDC Projects
“How Big Things Get Done” provides a valuable framework for managing and executing large-scale projects. FNA’s rCBDC simulator aligns with the principles outlined in the book by offering a modular and adaptable approach that allows stakeholders to test and refine their strategies. The simulator also enables stakeholders to learn from simulation and iterate their designs. By embracing simulation and modelling as critical tools for rCBDC projects, central banks and other stakeholders can gain valuable insights into potential risks, challenges, and opportunities associated with digital currencies. This proactive approach will build a more stable and resilient financial landscape and ensure the successful integration of digital currencies into the global economy.
Ready to deliver a successful rCBDC project? Contact us today and let FNA’s cutting-edge rCBDC simulator help you mitigate risks, identify opportunities, and optimise your digital currency initiative. Our network analytics, economics, computer science, and finance experts will work with you to use and tailor our solution to meet your unique needs and goals.
To learn more, visit https://fna.fi/solution/cbdc-simulation/
