DEVELOPING NATIONS in the Asia and the Pacific region should consider using central bank digital currencies (CBDC) to make payments more efficient and inclusive, the Asian Development Bank (ADB) said.
“For developing countries in Asia and the Pacific, a CBDC may help improve financial inclusion,” the ADB said in a report released last month.
“CBDCs may allow central banks to tap the benefits of new digital technologies while retaining the power of a primary regulator, and might be more efficient than traditional fiat money in transfer fees, time reduction, and reach, through digitalization and distributed ledger technology,” it added.
A CBDC is a digital representation of a sovereign currency issued by and as a liability of a jurisdiction’s central bank or the monetary authority.
The Bangko Sentral ng Pilipinas (BSP) is testing the use of wholesale CBDC among selected financial institutions until 2024.
The ADB said CBDCs can be designed to be inclusive and convenient.
“A simple download of application software can replace the complicated, inconvenient, and costly onboarding process for users at the most basic level. A CBDC can then function similar to physical transactions using cash,” it said.
“It eliminates the intermediary and counterparty risk. The breakdown in trust among licensed payment institutions during crises is a bottleneck for central banks’ efforts to distribute money to the ultimate beneficiaries. A central-bank-authorized digital currency with distributed ledger technology has the potential to lower the cost of entry by eliminating or minimizing counterparty risk,” it added.
The multilateral lender also cited other opportunities from CBDCs, such as “risk mitigation, accurate measurement of economic activity, monetary and fiscal sovereignty, managed anonymity, elimination or lowering of trusted third-party cost for inclusion, more statistics on financial inclusion, innovation, distribution, and more clarity in lending.”
On the other hand, the ADB noted the potential risks from using CBDCs.
“The design of a CBDC is particularly important, calling for clear understanding of how it can impact on the existing monetary system’s confidence when it is introduced,” it said.
“For example, the introduction of CBDCs might alienate segments of the population such as the poor or old people with insufficient digital infrastructure access or required skills,” it added.
Other risks include bank runs, financial disintermediation of incumbents, emergence of CBDC derivatives and engineered products, attracting valuation premium during crises, and uncertainty surrounding design and monetary policy management, among others.
“While there is more consensus now that a CBDC is a public good and may not bear interest, any discussion is conditional on the feasible CBDC designs and models in development,” the ADB said.
“Every country will take a different path. Even within a country, it is risky for the central bank to single out a so-called optimal technology roadmap, and anti-competition regulations are required to clear hurdles for technology innovation…the discussions here are on current CBDC developments, and many of these risks may disappear and others emerge as governments gain better understanding and respond accordingly with new measures,” it added. — L.M.J.C. Jocson