What can central bank digital currency do for emerging markets?

Since 2008, cryptocurrency has taken the financial world by storm through its ability to deliver peer-to-peer payment that is faster, cheaper, more secure, more convenient and more efficient than traditional legacy-based banking systems. As a result, cryptocurrency is increasingly becoming a potentially key tool for central banks to leverage for the development of a central bank-backed digital fiat currency (DFC / CBDC).

Central banks have started to actively explore central bank digital currency (CBDC) — a new digital form of legal tender that mimics cash.

What is central bank digital currency?

Our initial note “The benefits and potential risks of digital fiat currencies” highlighted that CBDC may:

• Enhance the efficiency of national payment systems
• Ease the convenience of payment processes through mobile phones as primary financial services instruments
• Encourage the broad digitization of traditionally cash-based societies

Understanding the use case for central bank digital currency

Mobile money has been a key enabler of financial inclusion and the uptake of digital financial services, especially in sub-Saharan Africa. Given that a viable CBDC will most likely run on existing payments rails (such as mobile money), it is important to understand how mobile money can facilitate CBDC without negatively affecting financial inclusion.

Key findings suggest that mobile money may be a positive use case for CBDC but it is not without potential risks. The application of retail CBDC to mobile money has the potential to foster greater interoperability, improve payment efficiency, facilitate cost-saving gains by minimising reconciliation complexity and notional costs, as well as reduce the key payment risks that are typically associated with mobile money.

Furthermore, if implemented appropriately, CBDC can encourage trust in mobile financial services and ease the liquidity constraints of mobile-money agents.

If implemented incorrectly, CBDC risks not only exacerbating contextual inequalities, but also intensifying the perceived complexity of mobile money and exposing certain unstructured supplementary service data (USSD) providers to cyber-security threats. With several countries, including those in sub-Saharan Africa, investigating CBDC, it is vital that steps are taken to ensure the safety and security of the consumers.