Central Bank Digital Currencies in Emerging Market Economies

In recent years, in both advanced and emerging market economies, central banks have increasingly been involved in projects related to central bank digital currencies—that is, digital currencies denominated in national units of account, and which are a liability of the central bank (BIS (2021)). But the stages of participation in research, pilot or distribution vary from country to country. The Institute of Financial Technology of Renmin University of China has compiled the core content of the article.

This article first discusses the main motivations for central banks of emerging market economies to participate in central bank digital currencies, focusing on the rationale for retail central bank digital currencies. The second part reviews the main concerns of central banks regarding retail central bank digital currencies, including data privacy and data governance. Section III discusses design choices for retail central bank digital currencies that address possible issues while furthering central bank goals. Section IV discusses the impact of cross-border use of central bank digital currencies and related design considerations.

The driving force behind the issuance of central bank digital currencies

1. Provide cash in digital form

The digital revolution is changing the payments landscape. Payments are no longer monopolized by commercial banks as big tech companies and fintech companies enter the financial services space. New forms of digital assets such as cryptocurrencies and stablecoins are also emerging as a potential means of payment. In many emerging market countries, including India, Pakistan, Kenya and Tanzania, digital payments via mobile phones have gained the upper hand. At the same time, the cash-to-GDP ratio, which represents the proportion of cash used in payments, declined in some emerging market economies. For example, cash in China may lose its central role in the near future.

Central Bank Digital Currencies in Emerging Market Economies

2. Strengthen financial inclusion

Financial inclusion in a broad sense means that individuals and businesses can obtain and use financial services at low cost. Inclusiveness in emerging market economies has increased over time, but remains low in some regions. As of 2017, nearly one-third of the world’s adults were unbanked; that number was more than half in Africa and nearly 40 percent in Latin America and the Caribbean.

Central Bank Digital Currencies in Emerging Market Economies

3. Improve domestic payment efficiency

The introduction of central bank digital currency as an alternative payment method may affect the competitive structure of the underlying payment system. By design, it could improve competition and reduce costs; it could also help prevent “walled gardens.” The Central Bank of Israel has raised a concrete possibility: In economies with already functioning payment ecosystems, a central bank digital currency could benefit from so-called late-mover advantages and build on the latest innovations to address existing services weakness.

Risks of Issuing Central Bank Digital Currencies

Central Bank Digital Currencies in Emerging Market Economies

1. Operational risk

A key operational challenge is dealing with cyber risk. A successful cyberattack on a central bank digital currency could cause widespread and severe damage. We can learn about the threats involved from attacks on financial systems, such as hacking of credit card systems or databases containing consumer credit profiles. Defending against such attacks is much more difficult given the multiple linkages to the wider financial and digital ecosystem.

2. Bank disintermediation

In general, deposit disintermediation, such as central bank digital currencies, stablecoins, or large technologies in financial services, may induce affected banks to rely on less stable sources of funding, such as wholesale or money markets. This, in turn, could reduce the supply of credit to affected banks and increase lending rates (Figure 3). In fact, banks’ funding costs (including access to deposits) are highly correlated with lending rates. Not surprisingly, most respondents expressed concern about the impact on credit supply (Graph 4, left-hand panel).

Central Bank Digital Currencies in Emerging Market Economies

3. Low user usage

Central bank digital currency adoption is driven by its role for consumers and merchants. Low adoption of central bank digital currencies could hamper policy goals the central bank hopes to achieve.

Central Bank Digital Currencies in Emerging Market Economies

The design of central bank digital currency from the perspective of driving and risk

The central bank’s survey responses and background paper elucidate six key design features that could help enable central bank digital currency issuance incentives while alleviating attendant concerns. In Table 1, we report the central bank’s stance on these design features.

Central Bank Digital Currencies in Emerging Market Economies

Design considerations for cross-border central bank digital currency

Cross-border central bank digital currencies can help improve the cross-border payments landscape. International payments such as remittances are still very expensive. On average, paying $200 costs about $14 (World Bank (2019)). The time required is also longer, generally three to five days. Cross-border central bank digital currencies can help reduce reliance on intermediaries, thereby reducing transaction costs and time. Of the central banks surveyed, 54% expect a central bank digital currency to “significantly” reduce the cost of cross-border transactions, while another 31% expect “some” cost savings. These savings can yield considerable economic gains, especially for economies that rely heavily on remittances. In the Philippines, for example, inbound remittances totaled $2.7 billion in September 2021, or about 8% of GDP.

Central Bank Digital Currencies in Emerging Market Economies

Below are some screenshots of the report

Central Bank Digital Currencies in Emerging Market Economies

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