Central bank digital currencies (CBDCs) are often touted as a means to achieve financial inclusion for the unbanked and underbanked populations. However, a recent paper by the Bank of Canada reveals that the reality is more complex and challenging than it seems.
What are CBDCs and why do they matter?
CBDCs are digital versions of fiat currencies that are issued and backed by central banks. Unlike cryptocurrencies such as Bitcoin, CBDCs are not decentralized and operate under the authority of the central bank. CBDCs aim to provide a secure, efficient, and inclusive means of payment, while preserving the stability of the financial system.
CBDCs have gained significant attention worldwide, as many central banks are exploring or experimenting with them. According to a survey by the Bank for International Settlements (BIS), 86% of central banks are actively researching CBDCs, 60% are experimenting with them, and 14% are deploying pilot projects.
Some of the potential benefits of CBDCs include:
- Lower transaction costs and faster settlement times
- Enhanced financial inclusion and access to digital services
- Reduced reliance on cash and private intermediaries
- Improved monetary policy transmission and financial stability
- Increased competition and innovation in the payment sector
What are the challenges of ensuring true financial inclusion with CBDCs?
However, introducing CBDCs is not a silver bullet for financial inclusion. A recent discussion paper by the Bank of Canada highlights three criteria for true inclusion: financial, digital, and practical accessibility.
- Financial accessibility means that CBDCs should be available to everyone who wants to use them, regardless of their income, wealth, or credit history. This implies that CBDCs should be free or low-cost, widely accepted, and interoperable with other payment systems.
- Digital accessibility means that CBDCs should be easy to use for everyone who has access to digital devices and networks. This implies that CBDCs should be compatible with various platforms, devices, and applications, and that users should have adequate digital literacy and security awareness.
- Practical accessibility means that CBDCs should be convenient and suitable for everyone’s needs and preferences. This implies that CBDCs should offer various features and functionalities, such as offline capability, privacy protection, and user-friendly design.
The paper argues that these three criteria are interrelated and interdependent, and that achieving them requires a holistic approach that considers the needs and challenges of different segments of the population.
For instance, the paper cites the example of the indigenous First Nations in Canada, who face multiple barriers to financial inclusion. These include:
- Geographic isolation and lack of physical access to financial institutions
- Cultural differences and lack of trust in the mainstream financial system
- Low levels of digital connectivity and literacy
- High rates of poverty and unemployment
The paper suggests that addressing these barriers would require not only providing CBDCs, but also improving infrastructure, education, regulation, and collaboration among various stakeholders.
How can central banks ensure CBDCs reach everyone?
The paper acknowledges that there is no one-size-fits-all solution for designing and implementing CBDCs. Different central banks may have different objectives, constraints, and trade-offs when developing their CBDCs. Moreover, different countries may have different social, economic, and institutional contexts that affect the demand and supply of CBDCs.
Therefore, the paper recommends that central banks should adopt a user-centric approach that involves:
- Conducting extensive research and consultation with potential users and other stakeholders to understand their needs, preferences, expectations, and concerns regarding CBDCs
- Designing CBDCs with features and functionalities that cater to diverse user segments and use cases, while balancing efficiency, security, privacy, and inclusion
- Testing and piloting CBDCs with real users in real environments to evaluate their performance, usability, impact, and feedback
- Monitoring and evaluating CBDCs after deployment to measure their outcomes, benefits, costs, risks, and challenges
The paper concludes that CBDCs have the potential to enhance financial inclusion if they are designed and implemented with care and consideration. The real work lies in ensuring they are within everyone’s grasp, irrespective of their digital proficiency, age, or physical abilities. The road ahead is long, but with proactive action and genuine intent, central banks can turn the promise of CBDCs into a reality.
