How Central Bank Digital Currency (CBDC) Can Drive Financial Inclusion?


CBDC can usher in new monetary systems that are more inclusive for people

Central bank digital currency (CBDC), a new digital fiat currency, has started actively making its way into Central banks. Many countries are interested in issuing this digital currency. This interest is growing exponentially in applying the underpinning technology of cryptocurrencies toward central banks and their money-making operations. Countries like China, South Korea, Brazil and Japan are already exploring CBDCs. 

These digital currencies can significantly enhance the efficiency of a country’s payment systems, provide ease of use to payment processes through mobile phones as primary financial service instruments, strengthen the broad digitization of traditionally cash-based societies, and more. They could also provide the financial stability, security and inclusiveness of an economy.

CBDCs are expected to contribute to financial inclusion. If they do so, financial leaders must consider how these digital currencies can address the needs of unbanked and underbanked people. They must identify and deal with the root causes of financial exclusion that cannot be solved by CBDCs, and establish principles for an inclusive central bank digital currency design that is centered on the financial needs of people instead of institutions.

With the emergence of ubiquitous digital payment applications, financial services providers are as well as countries are moving towards a cashless society. According to a Belfer Center report, around 30 percent of adults in the US in 2018 did not use cash at all in a typical week, compared to less than 25 percent in 2015. On the other side, cashless payment transactions in China surged over 50 percent year-on-year in 2019. Now the ongoing COVID-19 pandemic has given rise to digital payments, leading somewhat to the growth of CBCDs. The report further reveals that over 50 central banks have pursued or are engaging in CBDC work as of August 2020. Ten central banks have already piloted or announced plans to pilot a CBDC in the near term, most are in the early stages of research and experimentation.

In contrary to private cryptocurrencies and digital payment systems, CBDCs provide central banks and governments with anonymity and transparency of financial transactions in trade-offs. The anonymity and transparency trade-offs are a critical technical and policy design choice for policymakers seek to lessen the social costs from financial crimes and national security concerns and protect individual data privacy.


CBCD and Its Impact on the Financial System

The interest in CBDCs stems from developments that slightly started with the 2008 financial crisis. As a digital representation of a fiat currency, central bank digital currency is a government-issued cryptocurrency designed to replace the traditional, physical form of fiat currencies. With increased potential and benefits, CBDCs also raise questions about the role of central bank money, direct access to central bank liabilities, and the structure of financial intermediation.

In its research paper, the Bank for International Settlements (BIS) describes CBDCs using a Venn-diagram called the “money flower”. This focuses on the blends of four key properties: issuer – a central bank or other; form – digital or physical; accessibility – widely or restricted; and technology – token- or account-based. According to the paper, access to digital central bank money currently is limited to central bank operating hours, traditionally less than 24 hours a day and usually five days a week.

Moreover, since CBDC has begun taking root into central banks as an essential concept for economic development and financial stability, it can create a path to supply money to the digital economy and meet public policy goals.

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