Nine out of 10 central banks are exploring electronic versions of physical cash, according to the Bank for International Settlements 2021 survey of monetary authorities released this month. It seems almost everyone is convinced that the future of money is digital. While this may be true, does every country still need to be on the bandwagon? Not necessary. Whether you are Poland or Peru should make a big difference in deciding how big of a priority a central bank digital currency, or CBDC, should be.
More advanced economies faces a specific challenge: a decrease in demand for cash. The share of banknotes in point-of-sale transactions has declined to 11% in North America, 19% in Asia-Pacific and 27% in Europe. As currency bills eventually begin to disappear from circulation and into safes, public confidence in the convertibility of bank deposits into official money, in the words of the European Central Bank’s Ulrich Bindsil and others, “is more of a theoretical construct than a daily experience.” ” Maybe. ,
This could be problematic for financial stability, especially if stablecoins—private-sector tokens such as stablecoins — cryptocurrencies that promise 1:1 convertibility with the dollar or other widely accepted assets — step into breach and become official. replace cash. For emerging markets, this would mean a return to “dollarisation” and the end of decades-long efforts to establish sovereign currencies of their own.
Fortunately, this is not yet a universal problem. According to the FIS Worldpay Global Payments Report 2021, cash continues to dominate the payments landscape in Latin America, the Middle East and Africa. Even in some highly developed economies like Japan, it is not likely to disappear anytime soon. In other words, not all central banks face the same urgency in preparing for a post-cash future once it goes digital.
So who needs a CBDC first? The difference between Poland and Peru can help answer that question.
According to MSCI Inc., both are emerging markets, although the Central European country has a per capita income of $15,000 which is two and a half times that of the Latin American country. Both have a fairly short history of currency sovereignty. As Poland set out to rebuild its former command-and-control economy in the 1990s, the zloty dominated 3:1 in foreign cash commerce. (Until the 1980s, authorities printed a special legal tender against dollar deposits. These “bony” notes could be used for everything from American cigarettes and Japanese cameras to clothing in Western Europe, but Poland’s It had no value outside.) Peru entered the new millennium. With 80% of bank deposits denominated in dollars.
But when Poland and Peru are both counted as dollar declining success stories, their retail financial landscapes look very different. Poland spent the 90s improving its currency management, and eventually won the confidence of the population in the zloty, as a medium of exchange and a store of value. Peru’s mountainous topography complicates things further. Dollar bills (and bank deposits) are still a part of the country’s bi-monetary system. Financial inclusion has not developed sufficiently, especially in rural areas.
About 10 in 10 Polish adults have bank accounts; Only over half of Peruvians do so. The payments industry in Poland is highly competitive, with consumers enjoying a variety of non-cash options for settling claims. BLIK, the major network available to almost all mobile phone users, is now more widely used in e-commerce than cards. The pandemic also gave a push to BLIK. Embedded in the applications of many banks, it is seeing increasing acceptance in person-to-person payments as an alternative to cash. In Peru, where internet access is limited in rural areas, COVID-19 increased precautionary currency hoarding: cash in circulation increased from 7% in 2018 to 10% of GDP.
Given the plethora of choices for consumers, the Polish authorities do not see the need to add one more. “So far, no specific social purpose has been identified that the issuance of digital zlotys will serve,” Polish Monetary Authority officials wrote in a recent paper included in a BIS study of attitudes toward CBDCs in emerging economies. In Peru, on the other hand, acceptance of non-cash instruments is low. Digital payments are on the rise. But most transfers happen in a closed loop between customers of the same financial entity.
Peru hasn’t made up its mind about digital cash just yet, but it isn’t ruling it out either. “In the medium term, we see that some payment flows could be improved by introducing domestic CBDCs,” its central bank officials wrote for the BIS study.
For example, if shoppers could receive and pay in a digital solution, suppliers of goods to half a million mom-and-pop stores would save on cash collection costs. The government’s conditional cash transfers and pension payments – as well as fees and service charges paid by people to state agencies – will not require an expensive trip to a bank branch. In rural areas, the risk of robbery associated with the exchange of physical bills will be reduced. If the anonymity of cash remains, people may prefer to transact using CBDCs. There won’t be long queues to buy prepaid cards from different operators if 80% of Lima’s population who travel by bus can pay for rides using a CBDC. Rural migrants working in the capital will be able to send money home in an economical way.
Before committing themselves to digital cash, emerging markets need to ask themselves whether they are closer to Poland or Peru. If the private sector in their country cannot or will not provide high-quality, interoperable payment solutions at a reasonable cost to all, central banks need to act quickly – both to uphold currency sovereignty and financial inclusion. to expand. Otherwise, they can afford to wait.
This story has been published without modification in text from a wire agency feed. Only the title has been changed.