AFI members explore central bank digital currency opportunities

Central bank digital currencies (CBDCs) propelled by broader trends, offer opportunities to accelerate digitization for emerging and developing economies amid COVID-19, speakers said at a virtual event on 12 November.

The webinar, the last virtual event for AFI Working Groups in 2020, was organized by the Digital Financial Services Working Group (DFSWG) and provided a platform for discussions on the benefits and risks of CBDCs and how tie-ups with other market players could kick start an inclusive global digital economy.

Making a case for the thorough analysis of CBDC options, AFI Deputy Executive Director Norbert Mumba said that regulators “should focus attention on defining and discussing the evolution, design, use cases and opportunities for central bank-issued digital currencies, focusing specifically on an inclusive and sustainable digital future for the 1.7 billion currently excluded”.

He added that the readiness of members to enable and support innovation at scale must remain a high priority, adding that “we must evaluate the uniqueness of our individual country context, institutional culture, capabilities, resources, immediate-to-long term strategies and goals, market, consumer behavior and much more to reliably determine our position, approach and actions going forward”.

Central banks across the AFI network are increasingly exploring the potential of CBDCs to modernize payment and financial systems ahead of the much-anticipated global digital economy. Last year, DFSWG members agreed to explore relevant links between digital currencies and financial inclusion at meetings in Nassau, The Bahamas. Subsequent working group meetings have reiterated this position.

This trend was reflected in a recent report by Bank of International Settlements that found around 40 percent of emerging and developing markets economies had already conducted experiments on CBDCs, with around 10 percent at the pilot stage.

Central Bank of The Bahamas (CBB), arguably the world’s first central bank to issue a CBDC, was among the speakers with Bobby Chen, assistant manager of eSolutions, delivering an in-depth presentation on its trailblazing “Sand Dollar” digital currency.

Launched nationwide in October, the token-based digital currency is said to provide the potential to boost economic activity and, by extension financial inclusion, as it is open to users irrespective of their immigration or work permit status. As such, it can be used to disburse social assistance and provide remote access to financial services on sparsely populated islands.

Chen expressed hopes that the “Sand Dollar” and policies put in place to support it will create a domino effect and provide clear linkages and evidence for financial inclusion, so other countries may follow suit.

“We developed the ‘Sand Dollar’ out of necessity … as certain financial institutions in the more remote parts of the country were finding it unfeasible to operate in thinly interacted locales, leaving a huge financial inclusion gap,” he said.

More than 150 participants from 53 countries attended the event, which was moderated by Prof. Olayinka David-West from Lagos Business School.

Putting the discussions into context, Prof. Douglas Arner, Faculty of Law at Hong Kong University, noted how CBDCs had been recently catapulted into the global spotlight with the proposed launch of Facebook’s Libra and China’s Digital Currency Electronic Payment as well as soaring demand for cashless transactions during the ongoing pandemic.

“We’re still at early stages for CBDCs and there are many options,” he said, adding that regulators must study carefully the relevant features available including on accessibility (widely or restricted) and technology (token- or account-based).

Whatever the final product, Prof. Arner reiterated that security would be “paramount” in combating fraud and counterfeiting, adding that this emphasized the need to understand the design, technology, capacity, risk and capabilities of digital currencies.

“The potential for many developing countries is huge. Central banks tend to take things slowly and carefully, and this is one of those areas that should not be rushed,” he said.

Also urging regulators to consider the wider technology context – particularly for financial and payment system actors and stakeholders – was Mastercard’s executive vice president of digital asset products, Raj Dhamodharan. When developing a CBDC, he said that central banks should ensure that it is evaluated as part of a broader payments toolkit, embraces private sector participation, delivers interoperability and open acceptance and safeguards consumers interests.

Underscoring this final point, he said that “consumers should be confident that CBDCs provide the necessary protections for in-person and online transactions while also understanding how these protections may differ from those offered by other payment methods”.

Outlining several use cases for digital currencies from a market and consumer perspectives, Anca Bodgana Rusu, head of partnership, policy and advocacy at cLabs, a non-profit organization that operates its own open digital currency platform, noted how CBDCs could leverage simple features to help onboard groups with low literacy levels.

She cited several examples of ongoing cases of digital currencies used for COVID-19 relief programs, government stimulus vouchers and resilience efforts to sustain livelihoods in several countries, highlighting how potential CBDCs could reach the underserved, ensure accountability of the programs through traceability, real-time audit for fraud detection and also as a solution to bank de-risking.

“There are a wide range of options, and it depends on what a central bank wants to do with CBDCs and what kind of features they want to have,” she said.

In 2020, AFI working groups organized close to 60 virtual events facilitating policy development, information exchange and peer learning by generating and incubating knowledge and best practices across the network on key financial inclusion thematic areas.