Home Digital Currencies CBDCs’ financial inclusion potential examined in World Bank-BIS paper

CBDCs’ financial inclusion potential examined in World Bank-BIS paper

Internet connections: offline functionality is yet to be provided by many CBDC projects, the paper points out | Credit: Pixabay; aitoff

Offline capabilities, low-cost transactions and data portability are among the features that central bank digital currencies (CBDCs) must have in order to play a significant role in addressing financial inclusion challenges.

That is among the conclusions of a newly released paper jointly authored by staff from the Washington DC-headquartered World Bank Group and Switzerland-based Bank for International Settlements (BIS) after interviewing nine central banks at various stages of implementing or exploring retail CBDCs.

‘Central bank digital currencies: a new tool in the financial inclusion toolkit?’ is published as most central banks worldwide are researching, and engaging private companies, to work out how a CBDC – should they eventually decide to introduce one – would operate.

The central banks interviewed take the view that, while CBDC is not a panacea, it can represent a further tool to promote financial inclusion if designed with this objective, the paper’s authors explain.

The 39-page paper outlines findings in three main areas: existing barriers to financial inclusion that could be addressed by a CBDC; CBDC design features that many jurisdictions view as critical to addressing these barriers; and the challenges foreseen, along with legal and regulatory changes needed for CBDC implementation.

The People’s Bank of China (PBoC) – which is expanding trials of its digital yuan – was among the central banks questioned and provides numerous specific examples illustrating how China is ahead of the pack in many areas of its experimentation. The further monetary authorities interviewed (during the second half of last year) were the Central Bank of The Bahamas (which launched its Sand Dollar in October 2020), Eastern Caribbean Central Bank (which is also live with a CBDC – ‘DCash’), Bank of Ghana (which last year partnered German company Giesecke+Devrient to undertake CBDC experimentation), as well as the Bank of Canada, Central Bank of Malaysia, Bangko Sentral ng Pilipinas, National Bank of Ukraine and Central Bank of Uruguay.

Offline functionality important

Barriers to financial inclusion inevitably differ across the diverse spread of nations whose central banks were interviewed, but the paper found six common elements including: geographic obstacles related to vast territories and remote locations; low trust in existing financial services; and institutional and regulatory factors such as a lack of public goods, for example identity credentials.

In respect of the latter point, the Philippines is highlighted for working towards a universal digital ID system that would enable online and offline authentication and, in turn, facilitate digital payments such as disbursements to cash assistance beneficiaries.

But among the numerous challenges faced by CBDC architects, offline functionality is considered critical if CBDCs are to play a significant role in helping with financial inclusion, the paper states.

‘The approach to providing it is still being explored, recognising that any solution would have to be a coherent package to provide access consistently,’ the authors explain. ‘An important consideration with enabling an offline mode for CBDC is the risk of potential double-spending and the possible creation of fake tokens. For many of those that have piloted and/or launched services, offline functionality is yet to be provided, probably due to these potential challenges (although the e-CNY in China has already provided offline functions).’

The paper references Bank of Ghana’s exploration of the potential of smart cards to function in locations with limited or no network coverage and inconsistent electricity supply. Its proposed plan will have offline transactions operating in a similar manner to cash, whereby settlement onto cards is in real time, with tokens moving between cards and without the need for a back-end settlement system.

CBDCs for government payments

The paper goes on to state that using a CBDC for disbursing government payments was seen by interviewees as important for driving a critical mass of users and greater inclusion.

Some of the central banks are already exploring the potential alongside government departments, according to the paper, which states that the Eastern Caribbean Central Bank has been exploring facilitating person-to-government payments for small taxes and other levies directly from CBDC wallets.

The National Bank of Ukraine has worked with the Ministry of Digital Transformation and other state bodies on programmable social disbursements while similar pilots have also been undertaken in China involving various government departments, according to the paper.

Some central banks interviewed are considering programmability features of CBDC to enforce rules or to apply conditions to payments.

Again, China emerges as a front-runner when it comes to the extent of its experimentation here, with the paper noting that programmable money features have already been used by some districts within the digital yuan pilot, whereby the CBDC, distributed through ‘red envelopes’, would expire in a few days if not used by the recipient.

Policymakers must ‘get design right’

As questions around CBDCs’ public policy benefits intensify, financial inclusion has typically received greater prominence in the developing world.

But the paper acknowledges pre-existing research focused on the developed world such as ‘Inclusion by Design: Crafting a Central Bank Digital Currency to Reach All Americans’, a paper published in 2020 by Jesse Leigh Maniff, a payments specialist at the Federal Reserve Bank of Kansas City in the US; it also mentions the G7’s CBDC public policy principles, published last October, which include reference to financial inclusion.

Earlier this week BIS’s general manager, Agustín Carstens, and HM Queen Máxima of the Netherlands, who is the United Nations secretary-general’s special advocate for inclusive finance for development, co-authored an article for opinion-page media Project Syndicate stating that CBDCs ‘could go a long way toward improving financial inclusion and driving innovation provided that policymakers get the design right’.

As well as flagging the benefits for social policies, they point out that CBDCs ‘could bypass many of the vested commercial interests that have cropped up around payment systems and contributed to inefficiencies and costs for users’.

*** Sweden and South Africa’s central banks have both recently issued updates on their CBDC experimentation. The Riksbank, which is among the major central banks most progressed in its CBDC work, has issued a 37-page summary of its testing of a potential technical solution for an e-krona (its ‘E-krona pilot Phase 2’ report) – including offline testing – while the South African Reserve Bank (SARB), in collaboration with the country’s Intergovernmental Fintech Working Group (IFWG) and focused on wholesale (interbank) CBDC, published a 60-page ‘Project Khokha 2’ report following the conclusion of a technical proof-of-concept (PoC).


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Interested in how governments and state authorities can encourage fintech innovation? REGISTER NOW for the inaugural Global Government Fintech Lab, being held in Tallinn, Estonia, on Wednesday 1 June 2022. Our agenda includes a session asking ‘How could CBDCs help deliver public good?’.