The authors of this study interviewed representatives of nine central banks that are at various stages of exploring the possible creation of central bank digital currencies (CBDCs) with the goal of increasing financial inclusion. Among the barriers to financial inclusion CBDCs might address are: (1) the challenge of providing in-person services in areas of low population density; (2) institutional and regulatory factors, such as individuals’ lack of identity paperwork, disincentives to formalize small businesses and insufficient consumer protection; (3) market failures, such as limited competition and the perceived unprofitability of serving certain groups; (4) demographic characteristics that can make it more difficult to access services, such as age, gender, income or disability status; (5) limited levels of financial and general education; and (6) low public trust in existing services.
The central bankers envision CBDCs enabling services and features such as: (1) low-cost payment services with fees set by regulators; (2) offline functionality for use in areas lacking consistent connectivity and electricity; (3) integration with existing payment instruments like credit transfers, payment cards and mobile money, including “interoperability with other cross-border CBDC systems and with government payment and collection streams;” and (4) “open application programming interfaces to share data with appropriate safeguards, such as separating transaction and personal data.” To prepare for the rollout of CBDCs, governments are looking to expand networks of cash access points and develop new tools for improving financial and digital literacy.
Among the expected challenges for using CBDCs to promote financial inclusion are ensuring data privacy and getting buy-in from key stakeholders, including people currently excluded from formal financial services. Combatting the misuse of user data will be essential to building trust around CBDCs and likely will require legal and regulatory changes to establish effective oversight over CBDCs, legal recognition of the currencies as an asset and punishment for criminal activity related to CBDCs.
This is a summary of a paper by Raphael Auer, Holti Banka, Nana Yaa Boakye-Adjei, Ahmed Faragallah, Jon Frost, Harish Natarajan and Jermy Prenio; published by the Bank for International Settlements and the World Bank Group; April 2022; 39 pages; available at https://www.bis.org/fsi/publ/insights41.htm.
By Arin Atluri, Research Associate
Additional Resources
Bank for International Settlements homepage
https://www.bis.org/
World Bank Group homepage
https://www.worldbank.org/en/home
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