The MIT Digital Currency Initiative and Maiden have published a report on central bank digital currency (CBDC) design choices and how this could impact financial inclusion.
A key difference between electronic money, such as mobile money, mobile apps, e-money or cards is that they are all intermediated, in contrast to cash which is not. And many retail CBDCs plan to use intermediaries. That raises issues such as cost, control, and trust.
The research specifies five areas that impact user perceptions, including custody, access, finality, data and distance.
While holding physical cash is comparatively risky, it provides control and the report suggests enabling self custody of a CBDC. Researchers interviewed potential end users in India, Indonesia, Nigeria, and Mexico, which highlighted the need for low income users to maintain control over their earnings.
Sometimes it’s a matter of trust, such as in Mexico, where there have been several incidences of fraud at financial cooperatives. But it’s also about trusting the intermediary to make payments promptly and be transparent about the charges involved. In contrast, a key benefit of cash is simplicity.
A second issue relates to access because not everybody has a bank account. There’s the challenge of needing formal identity documents for those without an account. Most CBDCs plan to limit transaction volumes and values based on the level of identity provided, which could render CBDCs less inclusive without a digital identity program.
Another area to explore is the finality of transactions, especially given cash transactions are instantly final. There’s a trade-off between finality and whether a transaction can be reversed if there’s a mistake in the amount or a dispute. The impact of human error is far more significant on someone living in poverty.
Data and privacy are already hot topics with CBDCs, but they can impact the poorest the most. For example, the data could be used for micro targeting or limiting how a user can spend a government benefit.
And lastly, distance is one area where a digital currency could have clear benefits because remittances can’t be done in cash without going through the likes of MoneyGram or Western Union. But other issues, such as identity and costs, are exacerbated for remittances.
The report concludes that trust is critical. There’s a paragraph that addresses the reservations of many potential CBDC users and our number one concern about CBDCs at Ledger Insights. “Considering the rise of authoritarian regimes around the world, the acceleration of the surveillance state, and the increasing challenge of regulating the technology industry, it is far from self-evident that citizens should trust a CBDC.”
Addressing these concerns will be critical to the adoption of any CBDC.