What Changes Will CBDCs Usher in for the New Year?
Emerging markets and digital currencies in 2021
Will 2021 be the year of the digital currency? Central bank digital currencies, or CBDCs, became a prominent topic in 2020, as COVID-19 accelerated the plans of many governments to issue an alternative to their fiat currencies.
From making it easier to implement more effective monetary policy, to providing financial access to those who may not have a bank account, to eliminating the germs found on paper currency, CBDCs offer an alternative to paper money. And emerging-market countries are leading the way to develop digital currencies.
The first digital currency
In fact, one of the first countries to launch one was the Bahamas, which did so in October of last year. The Sand Dollar was designed to provide people and businesses in some of the island nation’s far-flung locales with better access to financial services. While the currency is currently only able to be used inside the island nation, the government is working toward making cross-border usage possible.
Access to the unbanked
The major benefit of having CBDCs in emerging economies is providing access to the unbanked. According to the World Bank, approximately 1.7 billion adults lack a bank account.
In many emerging markets, citizens are more likely to have cell phones than a bank account. Hence, a digital currency makes sense to provide better financial access to the majority of the population.
Ariel Zetlin-Jones, an associate professor of economics at Carnegie Mellon’s Tepper School of Business, said via a phone interview that “Emerging markets have much more to gain from digital currencies, and have actually led the way in terms of mobile money, beginning with Kenya’s M-Pesa.”
Kenya’s Safaricom PLC and Vodafone kicked off the digital revolution in sub-Saharan Africa with M-Pesa in 2007. Prior to M-Pesa’s launch, the majority of Kenyans used cash and had little incentive to transfer their funds to banks. Due to the large network Safaricom and Vodafone built, Kenyan citizens had access to a digital safe.
The mobile-phone based money transfer service has since expanded beyond Kenya to countries including South Africa, Tanzania, Egypt, and Afghanistan. Safaricom is now in discussions to offer other savings and wealth management financial products through the app.
Cambodia also recently launched a digital currency in an effort to ramp up confidence in their financial markets. The Bakong system is accessible to anyone with a phone number, allowing payments in both the riel and the dollar.
Similar to many other emerging markets, the unbanked constitute a majority of Cambodia’s population. While less than 5% of the population has a bank account, more than 5 million had an e-wallet in 2019, a sizable portion of the roughly 16 million inhabitants the nation had that year, according to World Bank data.
China — Expanding trials to rural regions
China is the largest major economy with plans to launch a digital currency. With digital wallets such as WeChat and Alipay, China is already the largest cashless society in the world. In its biggest test to date for the digital currency electronic payment (DC/EP), officials circulated 20 million digital yuan to shoppers in Suzhou in early December.
Unlike the first testing done in Shenzhen, the Suzhou test allowed offline payment and contactless payment capabilities, using a technology based on radio frequencies. The significance of the Suzhou test is the use of near field communication (NFC), whereby users of the digital yuan are not required to have an internet connection. As one-third of China’s population lacks internet access, the Suzhou trial is vital to understand the opportunity to expand adoption in rural China and other developing countries.
China’s efforts to launch the digital currency align with ambitions to expand the country’s economic and trade presence, as well as reduce dependence on the U.S. dollar.
How will the DC/EP achieve its geopolitical goals and challenge the west-centric global financial architecture? Nir Kshetri, Professor at the University of North Carolina-Greensboro and a research fellow at Kobe University, said via email:
“Small businesses in developing countries are increasingly using cryptocurrencies to settle international transactions rather than in major international currencies such as the U.S. dollar and the euro, which involves a complex, costly, time-consuming process. The DC/EP may address many of these challenges and facilitate China’s economic and trade links with other countries, eliminating the need to buy U.S. dollars and pay fees to transfer currencies.”
Adding to China’s digital expansion plans, Hong Kong’s monetary authority, the Hong Kong Monetary Authority, is currently working with China’s central bank on cross-border trade usage with the DC/EP.
Will Russia join the fray?
Russia is also looking into the viability of a CBDC, investigating various options of decentralization and issuance. While a digital currency is possible, the country has enacted several anti-crypto laws, including a recent bill outlawing institutions that make crypto trading and issuance possible.
The bank of Russia has said it will allow no tokens besides the ruble, in response to news that Sber (formerly Sberbank), the country’s largest commercial bank, was looking into launching its own digital asset.
As more and more countries research CBDCs, what are the implications? Regulations, security concerns and privacy issues must all be considered. Each digital fiat currency will have its own distinguishable features, with each country looking to solve their unique pain points.
And while developed nations are researching CBDCs, they are doing it at a much slower pace. As Zetlin-Jones stated, “while CBDCs will benefit developed economies, the gains are far greater for emerging markets.”
This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
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