Central bank digital currencies could ‘promote financial inclusion’

As regulators around the world study the risks and benefits of adopting a central bank digital currency, central banks take the view that a digital form of a country’s fiat currency “could promote financial inclusion in the context of its payment properties,” authors at the Bank for International Settlements and the World Bank explained in a recent report.

The report was based on a survey of nine central banks at different stages of exploring CBDCs, including those in Bahamas, Canada, China, Caribbean, Philippines, Ghana, Malaysia, Ukraine and Uruguay. The BIS and World Bank interviewed those central banks and found that existing barriers to financial inclusion, CBDC design features and regulatory hurdles were among the main talking points.

Those CBDC design features, in particular, target the promotion of innovation in the so-called two-tiered payment system (a central bank issues digital currency to commercial banks to then distribute to consumers), as well as offering a low-cost public sector technological basis and facilitating enrolment and education, according to the study.

While domestic retail payment services and cross-border payments can be costly, “with CBDCs, central banks can help to speed up digital payment adoption, particularly when market size and profit potential are insufficient to motivate private sector innovation, or when established oligopolies prevent entry,” the authors said, adding that some central banks are considering issuing a CBDC given the uneven access to payment services.

CBDC issuance may require new regulations or existing laws to be amended for “effective oversight” of CBDC participants. Data privacy laws and anti-money laundering laws may need to be revisited if CBDCs come into play, the study found. This comes in addition to potential law changes regarding taxation, property foreclosure and disposal of digital wallets in bankruptcy.

The banks in the survey acknowledge that CBDCs are no panacea. A main argument for adopting a CBDC is the potential to promote financial inclusion. However, the populations targeted for inclusion may either be averse to or not have access to the technology. “Low-income populations and those living in remote locations continue to confront barriers to digital payments,” the report said.

Meanwhile, the U.S. is also grappling what the implications would be if the Federal Reserve were to create a CBDC. Federal Reserve Governor Christopher Waller on Aug. 5, 2021, said that he was “highly skeptical” of CBDCs and “I’m not convinced as of yet that a CBDC would solve any problems” that existing technologies don’t already address, he said. Fast forwarding about a year, New York Fed President John Williams said he sees a role for stablecoins in payments, though he noted some “fundamental flaws” for the broader cryptocurrency universe.

In April, the U.K. laid out steps to regulate stablecoins as a means of payment.