The adoption of central bank digital currencies has sparked debates because of their potential to transform finance by enhancing financial inclusion and payment system efficiency, while also reducing cash handling costs. However, concerns exist about privacy, security, and impacts on traditional banking. Achieving the right balance between innovation and regulation will be critical as countries consider issuing digital currencies.
Central bank digital currencies are digital versions of a country’s regular currency, like dollars or euros. They are backed by the central bank and are managed in a centralised way. This differs from cryptocurrencies such as Bitcoin, which are decentralised and not backed by any central authority.
It is important to clarify that some of the opposition to government-issued digital currency is not focused on the technology itself, but rather on concerns about its potential for misuse. This should not be interpreted as a critique of blockchain or any other emerging technology. The debates surrounding government-issued digital currency primarily revolve around issues of financial privacy and monetary sovereignty.
Digital currencies issued by central banks have experienced varying levels of success and adoption worldwide. Nigeria’s eNaira, for example, was envisioned to enhance financial inclusion. Despite being an early adopter in experimenting with and launching a digital currency, Nigeria has faced challenges. The limited adoption of the eNaira has raised doubts about the actual utility of such a currency. Presently, less than 0.5% of Nigeria’s population using the eNaira.
There are some concerns that such digital currencies might exclude certain population segments by phasing out cash.
China has been aggressively pursuing the development and implementation of its own digital currency. Despite the People’s Bank of China being vocal about its digital yuan project, specific details remain limited outside the country. The digital yuan was created with the aim of centralising a payment system dominated by tech giants Alibaba and Tencent. It serves as both a risk-free alternative to these platforms and a replacement for physical cash.
Transactions using China’s digital currency reached 1.8 trillion yuan (US$249.33 billion) in June 2023, a significant increase from the more than 100 billion yuan reported in August the previous year. This growth solidifies China’s position as a leader in this space, although global adoption is still in its early stages. China’s focus may now be expanding, with plans to use the digital yuan for international trade, potentially challenging the US dollar’s status as the world’s primary reserve currency and reshaping global geopolitics.
India is also among the countries currently rolling out its digital currency, despite already possessing a successful and robust digital payments system. The digital rupee has been gaining traction, but mainstream adoption may still be in its early stages. A recent milestone was reached when one million transactions were recorded in a single day. This achievement was attributed to government-owned and private-sector banks depositing salaries and benefits into their employees’ digital wallets. However, this milestone may not fully reflect the overall adoption of the digital rupee in the country.
It is evident that motivations for introducing digital currencies differ among central banks. Regardless of the reasons behind a country’s interests and motivations, it is crucial to focus on ensuring robust privacy protections and limitations on government control. Failure to provide this option may result in public fear and mistrust. The adoption of such digital currencies varies depending on each country’s unique circumstances. While Nigeria prioritised financial inclusion, India emphasised this aspect too but also cited concerns about the threat posed by cryptocurrencies to monetary sovereignty. In contrast, China may use its digital yuan for de-dollarisation initiatives.
There are lingering issues that need to be addressed. For instance, there are some concerns that such digital currencies might exclude certain population segments by phasing out cash. This apprehension could stem from infrastructural limitations, such as inadequate internet connectivity and lack of access to devices such as smartphones. This creates a “Catch-22” scenario where digital currencies aim to enhance financial inclusion, but their dissemination relies on critical infrastructure including the internet and smartphones. Without these resources, individuals are unable to utilise digital currencies, thus hindering their intended purpose. Yet these concerns could be alleviated by enhancing internet connectivity and increasing the ubiquity and affordability of smartphones – trends that are occurring in many regions worldwide.
These concerns underscore the importance of designing digital currencies with careful attention to privacy and inclusivity. To address these concerns, policymakers and developers should collaborate to create currencies that strike a balance between innovation, privacy protection, and financial stability. By incorporating privacy safeguards and ensuring that central bank digital currencies complement existing financial systems rather than replace them, it may be possible to alleviate these concerns and establish a more inclusive financial environment.
It’s vital to keep in mind that the primary function of money is to benefit the public. Unless the benefits of government-backed digital currency clearly outweigh the risks, achieving broad adoption may be difficult. Central banks should prioritise their nations’ distinct requirements and data privacy in their strategies.
