MICROFINANCE PAPER WRAP-UP: “Central Bank Digital Currencies: A Potential Response to the Financial Inclusion Challenges of the Pacific;” by Anton Didenko, Ross Buckley; Published by ADB

This paper explores how central bank digital currencies (CBDCs) might promote financial inclusion in the Pacific Islands. The Pacific includes countries that are “among the world’s most remote and geographically dispersed,” with great variability in access to basic infrastructure, such as electricity and internet access. Levels of internet usage and financial literacy are very low. Transactions in the region are overwhelmingly performed in cash, with larger transactions often paid using paper checks. The subsequent need to travel to financial centers to deposit and withdraw cash is particularly costly in the many areas “with highly dispersed populations and mountainous or multiple-island geography.”

In response, many Pacific Island nations have launched electronic money (e-money) services, “seeking to replicate rapid growth in regions such as sub-Saharan Africa or South Asia.” Eighty percent of central banks in the Pacific are engaged in some sort of digital currency work – often research or pilot testing. In Fiji, Samoa and Tonga, e-money payments have grown to encompass 0.8 percent, 1.1 percent and 2.8 percent, respectively, of each country’s GDP. Even as new users continue to sign up for e-money services, the rates of ongoing usage remain low.

One of the barriers to e-money usage is access to government-issued identification. For example, “An estimated 80 percent of the people in Papua New Guinea lack any clear form of identification.” This raises concern for the scalability of CBDCs. Another barrier to central banks issuing digital currencies is that such programs would require funding be reallocated away from other tasks, such as countering money laundering and terrorism financing, which is key to maintaining relationships with banks overseas.

Among the questions to be settled would be the ongoing role of bank notes and whether the currency would use a “token-based” or “account-based” verification system. The token-based method works similarly to cash in that the critical factor is whether the money is genuine. This can be verified using “a digital signature [as] used in public-key cryptography.” In an account-based design, however, there is a strong reliance on verifying the identity of the account holder, much as in the use of a typical bank account. However, an account-based design would only be “feasible in places with strong identity verification systems, and typically require good internet connectivity and smartphone use.” For this reason, a token-based CBDC may be much more suited to the Pacific Islands. However, one of the drawbacks of token-based systems is that they are more vulnerable to illegal activity, such as money laundering.

Given these complexities, the authors conclude that “now is not the time for countries in the region to issue a CBDC, but it is the time to begin to develop the expertise and understanding.” By taking plenty of time to prepare for such an effort, central banks may be able to develop systems that can solve the “financial inclusion and remittance problems that bedevil the Pacific region.”

This is a summary of a paper by Anton N Didenko and Ross P Buckley, published by the Asian Development Bank, August 2021, 40 pages, available at https://www.findevgateway.org/paper/2021/08/central-bank-digital-currencies-potential-response-financial-inclusion-challenges

By Arin Atluri, Research Associate

Additional Resources

ADB homepage
https://www.adb.org/

MicroCapital aritcle on El Salvador’s adoption of bitcoin
https://www.microcapital.org/microcapital-brief-el-salvador-plans-cryptocurrency-atms-chivo-app-kiosks-as-bitcoin-set-to-become-legal-tender-september-7/

More MicroCapital wrap-ups
https://www.microcapital.org/?s=wrap

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