Central Bank Digital Currencies in Emerging Market Economies

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

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

1. Deliver cash in digital form

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

2. Strengthen financial inclusion

Financial inclusion in a broad sense means that individuals and businesses can obtain and use financial services at low cost. Inclusion 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 did not have a bank account; that figure was more than half in Africa and closer to 40 percent in Latin America and the Caribbean.

3. Improve domestic payment efficiency

The introduction of a central bank digital currency as an alternative means of payment may affect the competitive structure of the underlying payment system. By design, it can improve competition and reduce costs; it can also help prevent "walled gardens." The Central Bank of Israel raises a concrete possibility: that in economies with already functioning payments ecosystems, central bank digital currencies could benefit from the so-called late-mover advantage and build on the latest innovations to address existing services weakness.

1. Operational risk

A key operational challenge is addressing 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 the hacking of credit card systems or databases containing consumer credit files. Defending against such attacks is much more difficult given the multiple linkages to the wider financial and digital ecosystem.

2. Disintermediation of banks

In general, the disintermediation of deposits, 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. In turn, this could reduce the supply of credit to affected banks and increase lending rates (Chart 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).

3. Low user utilization

Central bank digital currency adoption is driven by its effect on consumers and merchants. Low adoption of central bank digital currencies could hinder the policy goals central banks want to achieve.

The central bank’s survey responses and background paper articulate six key design features that could help realize the incentives for a central bank digital currency while mitigating attendant concerns. In Table 1, we report the central bank's position on these design features.

Cross-border central bank digital currencies can help improve the cross-border payment landscape. International payments such as remittances are still very expensive. On average, it costs about $14 to pay $200 (World Bank (2019)). The time required is also longer, usually three to five days. A cross-border central bank digital currency could help reduce reliance on intermediaries, thereby reducing transaction costs and time. Of the central banks surveyed, 54% expect central bank digital currencies to "significantly" reduce the cost of cross-border transactions, while another 31% expect "some" cost savings. These savings can yield substantial 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 percent of GDP.

The following are screenshots of some reports

Author | Sally Chen, Tirupam Goel, Han Qiu and Ilhyock Shim

Source | BIS

Compilation | Zhu Bingheng