How digital currencies can improve financial inclusion-IMF

The International Monetary Fund (IMF) has proffered that Central Bank Digital Currencies (CBDCs) can improve financial inclusion through programmability.

Speaking at a recent IMF-World Bank annual meeting held on Saturday, October 15, Bo Li, the deputy managing director at IMF said CBDCs can allow government agencies and private sector players to program and create smart contracts to allow targeted policy functions such as welfare payments, food stamps and consumption coupons.

“By programming CBDCs, those money can precisely target from what kind of money people can own to what kind of use the money can be utilized for food,” Li further said.

Besides, he said that they can lower the hurdles for using money substantially for several groups such as those without bank accounts, those without smart phones and those that don’t have internet access.

The former deputy governor of the People’s Bank of China also noted they are looking at data in terms of how to make the CBDC ecosystem an attractive option for private sector participants.

“For any CBDC ecosystem to work, it needs Public Private Partnership because the central banks will issue the obligations but we have to rely on the private sector to innovate, distribute, and serve the population.

“There are answers that Central Banks would have to provide on such as how to distribute data to service providers in a fair and equitable fashion that will perform healthy competition, protect data privacy and encourage innovation to unleash the value within those data.

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“So, that is why we are working with our member countries to explore the utilisation of data in this process so that we can create value and make it a sustainable business model for private sector participants in the ecosystem,” he concluded.

A digital currency is a means of payment or money that exists in a purely electronic form. It is designed to promote and facilitate financial inclusion, enable direct welfare disbursements and facilitate diaspora remittances.

Other objectives of a digital currency include cutting the cost of processing cash transactions, improving the availability and usability of Central Bank money, increasing revenue and tax collection, supporting a resilient payment system, and improving the efficiency of cross-border payments.

According to a recent blog by IMF, several Sub-Saharan African (SSA) central banks are exploring the use of digital currencies to enhance payment systems, following Nigeria’s October introduction of the e-Naira.

South Africa and Ghana are in the pilot phase of a digital currency, while Uganda, Kenya, Rwanda, Mauritius, Madagascar, Zimbabwe, Eswatini, Namibia, and Zambia are researching the process.

Central banks around the world are considering whether to issue their own CBDCs and are eager to understand its risks and opportunities, says Queen Máxima of Netherlands at the event.

“If designed and implemented with inclusion in mind, they could offer many options to expand access to the underbanked, serve the vulnerable and the poor,” Máxima said.

Máxima who is also the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development also said that CBDCs could pose new challenges and risks which would require sound approaches to overcome.

“So, I am encouraged that we are doing our homework and proceeding with a certain caution.”

On the points of caution to consider, Kristalina Georgieva, the managing director at IMF said, “We need to recognise the demand side dynamics, have better understanding of local barriers for inclusion and better understanding of why some payment instruments are preferred and others are not.”

Georgieva also added that there is need to think of the supply side, business models, incentive structures and institutional setups so that there can be a CBDC payment system that is worth the cost, that it is going to require from training to onboarding to ensuring data and cyber security.

“And lastly, we need to build it using lessons from existing payment systems like Indonesia that pioneered interoperable technologies such as standardized QR code,” she concluded.