Embedding financial inclusion in digital currency design

From pilot studies and ongoing research to the launch and use of national and private digital currencies, leading financial regulators and policymakers emphasized the potential that both private and public digital currencies hold in advancing financial inclusion, during the annual, virtual, high-level roundtable, co-hosted on 26 April 2022 by the Intergovernmental Group of Twenty-Four (G-24) and AFI, as part of the 2022 International Monetary Fund (IMF)/World Bank Group (WBG) Spring Meetings.

Opening the meeting, President of the Comisión Nacional Bancaria y de Valores (CNBV), Mexico and Chair of the AFI Board of Directors Dr. Jesús de la Fuente Rodríguez, stated that since “the adoption of technologies for digital payments is a desirable transformation and necessary to modernize the financial systems of our countries… it is time for central banks, regulatory authorities and institutions in charge of formulating public policy to design an environment for digital currencies to bridge gaps in terms of financial inclusion.” This would benefit vulnerable groups excluded from the current financial system in particular.

However, while digital currencies offer efficient and resilient payments, enhanced safety and trust, as well as digital financial inclusion, especially for the disadvantaged and vulnerable groups, financial regulators are cautious about the risks to financial integrity, stability and consumer protection.

The Role of Central Bank Digital Currencies (CBDCs)

As CBDCs become a future part of the financial systems, embedding financial inclusion in the design and early-stage experimentation is critical to ensure accessibility and appropriate levels of consumer protection and education. At the same time, a concerted effort is needed to overcome digital divides which could hinder the effectiveness of such technological innovations.

“The emerging digital technologies do not alter the mandates of central banks, but facilitate the means for central banks to achieve their mandate of providing safe, efficient and inclusive payment systems”, Governor Benjamin Diokno of the Bangko Sentral ng Pilipinas (BSP) said as he explained the BSP’s pilot project aimed at bringing hands-on knowledge about risks and opportunities of digital currencies for financial system and their potential in furthering financial inclusion.

The BSP identified that wholesale CBDCs could reduce transaction costs, shorten processing time and enhance transparency of large cross-border currency transfers widely used in the country with a significant number of workers abroad. 

Focusing on building BSP’s capacity on the functionality, architecture, technology, operational and organizational requirements of digital currencies, the project is experimenting with CBDC use and transfer across a limited number of institutions for both banks and non-banking institutions. Governor Diokno highlighted the importance of intersectoral approach, with different departments working together along with advisors from international standard setting bodies (SSBs) and multilateral institutions to train and share knowledge on CBDC design and implementation.

The push for the Sand Dollar

A global pioneer in public digital currency design, the Central Bank of the Bahamas, rolled out the Sand Dollar in 2020, the first full-scale national deployment of a CBDC globally, and is now encouraging its greater adoption. Whilst the pandemic has affected public education efforts, the Central Bank is working with the commercial banks to encourage adoption and expand use cases for the CBDC.

“From the financial inclusion point of view, we are careful to focus on a hassle-free ability to open up a mobile wallet account. We have a USD 500 limit [for the lowest tier of account type] and everyone, documented or undocumented, should be able to download mobile payment app, establish the account and transact”, Governor Rolle emphasized.

Government-to-person (G2P) payments is one of the key use cases that the central bank is examining together with the Government, in order to encourage access to and, usage of, the CBDC from the financial inclusion perspective.

“Some of the logistics we brought out with the sand dollar wallet require that we are more patient with the adoption process”, Rolle said noting that while the commercial banks should do the work of connecting the public with the CBDC, medium to long term balance is important for the central bank

“Going forward we recognize that policy focus will continue to deepen as we have to deal with data privacy and consumer protection, but we are very excited about what is ahead of us”, Governor Rolle concluded.

 
El Salvador adopts bitcoin

El Salvador was the first country in the world to adopt bitcoin as a legal tender in 2021, using it as a currency along the US dollar. President Douglas Pablo Rodriguez Fuentes of the Banco Central de Reserva de El Salvador shared some of the advantages brought about by this development.

He described the digital wallet Chivo as a “powerful medium of financial inclusion”, which has been able to reach those who have been excluded from traditional financial services.

“By March 2022 there were more than one million operations that have been carried out and we have around four million users active on our Chivo digital wallet”, the President said highlighting about USD 86 million in transfers.

 
Risks of crypto assets

Presenting the work of the Financial Stability Board (FSB) in crypto assets, Deputy Secretary General Rupert Thorne, Deputy Secretary General explained that their goal is to achieve global convergence around regulatory approaches to avoid arbitrage and fragmentation and promote greater certainty and clarity around the rules.

“Wide use of such assets may present particular financial stability risk in emerging markets, for instance, as additional channel for capital outflows. So it is important that this sector be properly regulated to be able to support stable and sustainable financial inclusion,” Thorne told the meeting.

He added that the FSB warned that crypto asset markets are fast evolving and could reach a point where they pose a threat to global financial stability due to their scale, structural vulnerability and the increased connectedness with the traditional financial system. Thorne underscored the need for timely policy responses not just to address financial stability risks but also potential misuse of crypto assets for money laundering and other criminal purposes.

The emergence of private and public digital currencies (CBDCs) raises new issues for central bankers and policymakers and requires reassessing the appropriate policy frameworks that are needed to cope with risks and opportunities arising from the ongoing digital transformation of financial services.

“When it comes to the role of CBDCs in advancing financial inclusion goals, it is very clear that there is an opportunity before all of us to ensure that financial inclusion considerations are embedded at the outset and with intentionality in the design phase, rather than trying to build inclusion in as an additional policy objective at a later stage, as was the case with the traditional banking system”, AFI Executive Director Dr. Alfred Hannig concluded in his closing remarks.

Closing the roundtable, Chair of the G-24, General Manager of the Banco de Guatemala Oscar Monterroso concurred that CBDCs designed with such goals in mind can pave the way for safer and more efficient cross-border transactions, which in turn will improve financial inclusion.  

This complex and evolving topic will benefit from further peer learning, global dialogue and international coordination of approaches, G-24 Secretariat Director Marilou Uy

“We must acknowledge the risks and the opportunities arising from these developments and seek proportionate and balanced policy approaches which respond appropriately to both, identifying and mitigating risks whilst seeking to avoid unintended negative consequences from innovation and inclusion”, G-24 Secretariat Director underlined.

About 150 participants took part in the 14^th G-24/AFI high level roundtable, from 45 G-24 and AFI member institutions The event takes place annually as part of the IMF/WB Spring meetings.