Central bank digital currencies can enhance payment systems, financial inclusion: IMF

November 21, 2023 (MLN): Central bank digital currencies can improve payment systems as well as financial inclusion—if they are appropriately designed, Tobias Adrian, Financial Counsellor and Director of the International Monetary Fund (IMF)'s Monetary and Capital Markets Department stated in his latest blog.

However, he stressed that if they are not appropriately designed, they could pose risks.

While not all countries may see an immediate case to deploy a CBDC, many countries are exploring CBDCs so they will have the option to introduce one in the future if it becomes pertinent for them.

Benefits are more likely to come in time, following the policies pursued by countries and the private sector’s response, as well as the evolution of technology.

In most cases, it would be useful for countries to continue exploring CBDC, carefully and systematically, as IMF Managing Director Kristalina Georgieva noted in her recent speech at the Singapore Fintech Festival.

The Bahamas, Jamaica, and Nigeria have already introduced CBDCs. And more than 100 countries are in the exploration stage. Central bankers in Brazil, China, the euro area, India, and the United Kingdom are at the forefront.

The IMF recently launched a virtual CBDC Virtual Handbook to collect and share knowledge with policymakers around the world, and to serve as a basis for the IMF’s engagement with country authorities.

The IMF intends this to be a living document that will be updated and expanded as their body of knowledge and analysis grows, and as new lessons and insights emerge from countries.

The chapters published thus far delve into various process and policy aspects related to CBDC.

One key consideration is the diverse approaches that countries may adopt when deciding to pursue CBDCs. The chosen path is influenced by factors such as the degree of digitalization in the economy, legal and regulatory frameworks, and the central bank's capacity.

In response to this variability, the IMF proposes a dynamic decision-making process in which central banks can proceed despite uncertainty. This approach enables them to adjust the pace, scale, and scope of their initiatives in response to changes in domestic and international conditions.

Moreover,  to help guide central banks in exploring and developing CBDC, the IMF has established a step-by-step guide to address the complex requirements and risks associated with CBDCs.

The global fund has called it the 5P methodology: preparation, proof-of-concept, prototypes, pilots, and production.

Furthermore, the fund has analyzed how CBDCs would likely affect monetary policy.

In general, policy transmission is not expected to be affected much under normal circumstances, but the effects can be more significant in an environment with low-interest rates or financial market stress.

The global financial institution further explains how CBDCs could be designed to facilitate cross-border payments while still managing capital flows.

With new digital technologies that can make payment infrastructure programmable, some of the capital-flow management measures could be implemented more efficiently and effectively with a CBDC compared to the traditional approach.

The IMF has also explored the CBDC’s role in promoting financial inclusion.

As a risk-free and widely acceptable form of digital money, with potentially lower costs and greater accessibility, CBDCs can increase financial inclusion.

If properly designed to replicate some of the properties of cash, CBDCs could gain acceptance as a payment mechanism for financially excluded populations—and be an entry point to the broader formal financial system, it said.

Looking ahead, the IMF’s engagement with central banks will continue as they pursue new technologies.

“We will keep assessing the potential effects of CBDCs on areas from financial stability to cybersecurity and cross-border payments and build on these first five chapters with new publications planned for next year. And we’ll continue our collaboration with other global bodies, including the Group of Twenty,” it noted.

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