By Anthony Oduu, Co-founder and CTO, Verto
We are entering a new era in finance, where digital currencies—ranging from cryptocurrencies and private virtual currencies to central bank digital currencies (CBDCs)—are emerging as pivotal instruments in the quest for financial inclusion and economic modernisation. These digital assets, unlike traditional forms of money, exist solely in electronic form, offering the potential to revolutionise transaction efficiency, reduce costs, and bring millions into the financial fold. However, they also introduce new challenges, including concerns over privacy, user adoption, and market volatility.
CBDCs, in particular, have garnered significant attention. A 2023 survey by the Bank for International Settlements (BIS) revealed that 94% of central banks are now exploring these digital sovereign currencies, with over half experimenting with proofs of concept and nearly a third already piloting projects. This article delves into the potential benefits and global impact of CBDCs, highlighting their role in transforming financial systems and fostering economic inclusion.
The Rise of CBDCs
CBDCs represent a new iteration of central bank money, offering a digital counterpart to a nation’s fiat currency. Unlike cryptocurrencies, CBDCs are centrally controlled, with the issuing central bank directly liable to the public, much as it is with physical cash. The primary objectives of CBDCs are to enhance payment efficiency and broaden access to financial services.
As of 2024, several countries have already launched CBDCs, with the Bahamas’ Sand Dollar and Jamaica’s Jam-Dex among the pioneers. Other nations, such as Norway and Australia, are advancing their research and development of these digital currencies. The appeal of CBDCs to central banks is clear: they promise to modernise payment systems for the digital age, extend financial services to underbanked populations, reduce the operational costs of maintaining complex financial systems, and retain monetary sovereignty in an increasingly digitised world.
Transforming Financial Access
The global financial inclusion gap remains significant, with approximately 1.4 billion adults unbanked as of 2021, according to the World Bank. A disproportionate number of these individuals are women, particularly in emerging markets. CBDCs offer a unique opportunity to bridge this gap by providing digital access to financial services, often via mobile devices or prepaid CBDC cards, enabling participation in the global digital economy.
Innovations such as Nigeria’s e-Naira, which employs tiered access structures to overcome traditional banking barriers, demonstrate the potential of CBDCs to simplify Know Your Customer (KYC) processes. By integrating with national digital identity systems, CBDCs can streamline the onboarding process, making it easier for marginalized groups, including international migrants, to access financial services. These advancements could significantly lower the barriers to financial inclusion, expanding the reach of digital financial services to the world’s most vulnerable populations.
Catalysing Growth in Emerging Markets
CBDCs are poised to play a transformative role in emerging markets, addressing some of the most critical economic challenges these regions face. By facilitating direct, low-cost digital payments, CBDCs can reduce the high fees associated with traditional remittance services—a critical need in many developing economies. They also promise to improve payment efficiency in regions where digital transactions are overtaking cash, further supporting economic activity.
Research from institutions like the Bank of England and Bloomberg suggests that digital currencies equivalent to 30% of a country’s GDP could potentially boost long-term economic output by 7% and improve overall welfare by 2%, driven by lower real interest rates and reduced reliance on distortionary taxes. By providing a more efficient means of transaction, CBDCs could enhance liquidity, enabling businesses and households to meet their financial needs without depending exclusively on bank deposits.
CBDCs in Action
Worldwide, nations are actively piloting CBDCs to address economic challenges and harness opportunities for growth. China’s digital yuan (e-CNY) is currently the largest CBDC pilot, with over 260 million wallets in use as of 2022. This initiative is not only advancing domestic digitalisation but also positioning the yuan for greater international influence. In Nigeria, the e-Naira is instrumental in reaching the country’s 40 million financially excluded citizens, providing a critical tool for economic inclusion and development.
Redefining Financial Sovereignty
Introducing CBDCs has the potential to recalibrate the global financial landscape by reducing dependence on traditional banking systems. By facilitating direct transactions with central banks, CBDCs could diminish the intermediary role of commercial banks, fostering a more decentralised financial environment. This could empower smaller nations and emerging economies, enabling greater participation in global markets and redistributing financial power on a global scale.
CBDCs could bolster monetary sovereignty by providing a stable, digitally native currency less vulnerable to foreign exchange fluctuations. By retaining greater control over monetary policy and economic stability, nations can further assert their autonomy in an increasingly interconnected world.
A New Financial Epoch
The advent of digital currencies marks a significant turning point in global finance. Just as credit cards, real-time payments, and digital wallets have transformed consumer behaviour and financial security, CBDCs have the potential to further enhance financial inclusion and stability. As these innovations develop, the interplay between CBDCs, cryptocurrencies, and private digital currencies will likely shape the future of global trade and everyday transactions, ushering in a new era of financial interconnectivity and opportunity.
