Nearly everyone seems to be convinced that the future of money is digital, but not every country needs to be on the bandwagon now. Nine out of 10 central banks are exploring electronic versions of physical cash, according to a survey released on May 6 by the Bank for International Settlements (BIS), but whether the country is Poland or Peru should make a big difference in deciding how big a priority a central bank digital currency, or CBDC, should be.
More advanced economies face a specific challenge: waning demand for cash. The share of banknotes in point-of-sale transactions has dwindled to 11 percent in North America, 19 percent in the Asia-Pacific region and 27 percent in Europe.
As currency bills eventually start vanishing from circulation and into vaults, the public’s trust in the convertibility of bank deposits into official money might become “more of a theoretical construct than a daily experience,” in the words of the European Central Bank’s Ulrich Bindseil and others.
Illustration: Yusha
That could be problematic for financial stability, especially if lightly regulated private-sector tokens such as stablecoins — cryptocurrencies that promise 1:1 convertibility with dollars or other widely accepted assets — step into the breach and replace official cash.
For emerging markets, that would mean a return to “dollarization,” and an end to decades-long efforts at establishing their own sovereign currencies.
This is not yet a universal problem. Cash continues to dominate the payment scene in Latin America, the Middle East and Africa, FIS Worldpay’s 2021 Global Payments Report says.
Cash is unlikely to disappear soon even in some highly developed economies such as Japan. In other words, not all central banks face the same urgency in preparing for a post-cash future by going digital.
So who exactly needs a CBDC first? The contrast between Poland and Peru might help answer that question.
While MSCI says that both countries are emerging markets, the World Bank says that as of 2020, per capita income was US$15,742.50 in the eastern European country and US$6,126.90 in the Latin American country.
Both countries have a fairly short history of currency sovereignty. As Poland set out to rebuild its formerly command-and-control economy in the 1990s, foreign cash dominated the zloty 3:1 in commerce, while Peru entered the new millennium with 80 percent of bank deposits denominated in US dollars.
However, while Poland and Peru are counted as success stories of dedollarization, their retail financial landscapes look very different. Poland spent the 1990s reforming its currency management, and eventually won the population’s trust in the zloty, as a medium of exchange and a store of value.
Peru’s mountainous topography has made things more complicated. US dollars — and bank deposits — are still very much a part of the country’s bimonetary system. Financial inclusion has not progressed sufficiently, especially in rural areas.
Almost nine in 10 Polish adults have bank accounts, while only a little more than half of Peruvians do. The payment industry is highly competitive in Poland, with consumers enjoying a wide variety of noncash options to settle claims. BLIK, the dominant network available to nearly all mobile phone users, is more widely used in e-commerce now than cards. The COVID-19 pandemic also gave a push to BLIK. Embedded in the applications of multiple banks, it is witnessing growing acceptance in person-to-person payments as a substitute for cash.
In Peru, where Internet access in rural areas is limited, COVID-19 led to a surge in precautionary currency hoarding: Cash in circulation rose to 10 percent of GDP, from 7 percent in 2018.
Given the surfeit of choices for consumers, 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 zloty would serve,” officials at the Polish Financial Supervision Authority wrote in a paper included in a BIS study of attitudes to CBDCs in emerging economies.
In Peru, acceptance of noncash instruments is patchy. Digital payments are growing, but most transfers take place in closed loops, among clients of the same financial entity. Peru has not made up its mind yet about digital cash, but it is not ruling it out either.
“In the medium term, we foresee that some payment flows could be improved by introducing a domestic CBDC,” National Bank of Poland officials wrote for the BIS study.
For example, suppliers of goods to half-a-million mom-and-pop stores would save on cash collection costs if shopkeepers could receive and make payments in digital sol. The government’s conditional cash transfer and pension payments — as well as fees and service charges paid by the people to state agencies — would not require an expensive visit to a bank branch.
In rural areas, the robbery risk associated with the exchange of physical bills would be reduced. If anonymity of cash is preserved, people might prefer to transact using CBDCs.
There would not be long lines to buy prepaid cards of different operators if the 80 percent of Lima’s population that travels by bus could pay for the rides using CBDCs. Rural migrants working in the capital city could send money home in a cost-efficient manner.
Before committing themselves to digital cash, emerging markets need to ask themselves whether their situation is closer to that of Poland or Peru. If the private sector in their country cannot or will not provide high-quality, interoperable payments solutions at a reasonable price to everyone, then central banks need to step in early — to hold on to currency sovereignty and expand financial inclusion. Otherwise, they can afford to wait.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia.
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