Central Bank Digital Currencies Not a Silver Bullet for Financial Inclusion, BIS

Central Bank Digital Currencies Not a Silver Bullet for Financial Inclusion, BIS

by May 4, 2022

While central bank digital currencies (CBDCs) have the potential to increase financial inclusion by lowering financial access barriers, they aren’t a silver bullet and must be part of a broader suite of tools and strategy that focuses on promoting universal financial access.

This is according to a new report by the Bank for International Settlements (BIS), which draws on interviews with nine central banks with advanced work on CBDCs and financial inclusion, and discusses the opportunities, challenges, risks and regulatory implications of government-issued digital cash.

According to the report, while access to payment services has grown in recent years, it is still far from universal: low-income populations and those living in remote locations still face barriers to digital payments; domestic retail payment services remain costly in a number of places around the world; and cross-border payments, especially low-value transfers like remittances, are still absurdly expensive and inefficient.

Against this backdrop, a number of central banks, especially those in emerging markets and developing economies (EMDEs), are exploring the prospect of CBDCs to both facilitate access to affordable financial tools and services, and improve public service delivery.



Of the central banks interviewed, the Bahamas, China, the Eastern Caribbean and Ghana showed the highest bullishness about the potential of CBDCs to enhance financial inclusion, citing for example the prospect of offline payments, and the potential for CBDCs to lower the cost of transactions.

Several of the central banks interviewed indicated however that a CBDC on its own, may not be enough to address financial inclusion challenges and should instead be part of a broader suite of tools and policies.

Design considerations for a CBDC

Respondents shared some of their design considerations when developing a CBDC system intended to enhance financial access.

For example, most central banks indicated either considering or implementing two-tiered CBDC designs that leverage the existing system of regulated financial intermediaries all the while allowing for new payment services providers (PSPs). Non-banks and PSPs are considered by many as critical participants in the ecosystem, especially for their ability to reach excluded and underserved segments of the population.

Respondents also outlined the need to offer a robust and low-cost public sector technology, with APIs being used to facilitate access to CBDC platforms for financial intermediaries. Some central banks are even providing white-labelled wallet that can be branded to specific service providers. PSPs would then compete on the functions and user interface of the wallets.

Fostering interoperability among multiple dimensions was named as another critical design consideration. This implies integrating CBDC with existing payment instruments including credit transfers, payment cards and mobile money, as well as with other cross-border CBDC systems and with government payment and collection streams.

Finally, respondents highlighted the need to support remote onboarding and the use of electronic know-your-customer (eKYC) methods to facilitate access to the CBDC system. Integration with existing or planned national digital ID systems was also mentioned as essential to facilitating remote onboarding.

CBDC design features can target financial inclusion barriers, Source: Central bank digital currencies: a new tool in the financial inclusion toolkit?, BIS, April 2022

CBDC design features can target financial inclusion barriers, Source: Central bank digital currencies: a new tool in the financial inclusion toolkit?, BIS, April 2022

Risks and challenges

But despite the many opportunities CBDCs promise to bring to the financially excluded, their introduction also come with some challenges and risks.

For one, CBDC issuance may require new laws and regulations to be enacted, or existing laws to be revised. Central bank laws may need to be changed to provide the appropriate powers to issue a CBDC and oversee the CBDC ecosystem. In addition, other relevant laws, including those for data privacy, anti-money laundering/combating the financing of terrorism (AML/CFT) and taxation may need to be re-examined.

One major concern outlined by central banks is whether or not the CBDC will be widely accepted by merchants and end-users. Only broad acceptance and adoption of the system by all key stakeholders will ensure that the CBDC has the intended impact, the respondents indicated. This will entail decisions on a number of key issues, including pricing of CBDC services.

Though broad adoption is certainly preferred, it also introduces the challenge of protecting consumers’ data privacy. One attraction of CBDCs for financial inclusion is that they create digital records of transactions, providing useful information to expand financial services such as credit to the unserved or underserved. However, this information could also be subject to misuse or abuse.

Hence, safeguarding data privacy and preventing the misuse of consumer data will be critical to ensure the same level of trust in the CBDC than other forms of central bank money. One promising approach is this area to separate individual transaction data from identity information and to engineer privacy by design, respondents indicated.

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