Central banks worldwide are embracing digital technology as they edge closer to launching their own digital currencies. How will this affect monetary policy in the future, particularly in emerging markets where many people lack access to bank accounts?
Central bank digital currency is a new form of digital currency offered by a central bank to replace fiat cash. Like cryptocurrencies and other private payment providers, central banks give users the ability to make digital payments without the use of physical cash. Governments in advanced economies are exploring CBDCs as a means to curb the growth of private payment providers and cryptocurrencies, which they see as a competitive risk to central bank-issued cash. Governments in emerging markets are interested in CBDCs as a means to promote financial inclusion and more effective digital payments systems.
There are three arguments now to advocate digital currency. Firstly, CBDCs will be universally accessible and widely used. Secondly, CBDCs will reduce dependence on physical cash, thereby making the distribution of money more efficient. Thirdly, CBDCs will be cheaper than other digital financial services. However, there are certain situations contradict above arguments. For exapmle, poor people in emerging markets don’t even have means of both receiving and spending that money digitally.
There is a lot of hope that retail CBDCs will add value for the underserved. However, where financial inclusion is an objective of CBDCs, we should ask whether such a currency actually improves the value proposition of digital financial services for the excluded consumer, compared to existing alternatives like e-money issued by non-banks.
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