Of the many benefits heralded by central bank digital currency evangelists, one in particular, cited by enthusiasts in advanced and emerging economies, is gaining increasing prominence. It is about the CBDC’s supposed ability to promote financial inclusion – defined as the integration of all citizens within the formal national banking system – and is seen as increasingly vital as many economies grow. are moving towards an all-digital payment infrastructure and eventually moving away from physical cash altogether.
In a research paper, the Central Bank of the Bahamas, arguably the world’s largest issuer of a CBDC, argued that “the main objective of the Sand Dollar Project is to provide financial services to those who are not currently integrated in the Bahamian banking system”. Similarly, in the United States House of Representatives, Congressman Stephen Lynch proposed the introduction of the ECASH law under which the US Treasury would issue digital money based on peer-to-peer tokens, essentially for those without bank accounts.
In the Bahamas, according to the central bank, the proportion of unbanked people is estimated at around 18% of the population. A 2017 study by the Federal Deposit Insurance Corporation found that the “unbanked or underbanked” (defined as citizens without bank accounts and/or using instruments such as non-banking payday loans for their daily financial activities) were estimated to be 25% of the US population. This is a significant figure for an advanced economy, although the strength of the non-banking financial institutions sector may also have something to do with it.
It is worth asking why, in two advanced economies, financial exclusion accounts for between a fifth and a quarter of the adult population. There is no doubt that a portion of the unbanked do not intend to open a bank account, either because they do not trust banks or because they do not have convenient local bank branch. Others are content to operate entirely within the monetary economy and enjoy its benefits of anonymity, atomic transactions, and universal acceptance. Still others may prefer to use a combination of cash and non-bank businesses – such as credit unions and payday lenders – for their day-to-day financial activities.
The advent of various forms of decentralized financial enterprises operating via smartphones with their potential accompaniment of non-bank payment instruments – stablecoins, tokens, altcoins and others – may allow people to participate in the digital economy without resorting to any to commercial banks, and in effect increase the unbanked population.
However, none of this is of much use to those who are excluded from the banking system because banks refuse their customers due to insufficient income or savings, poor credit history, insufficient credentials or prohibitive costs to serve. Greater granularity on the number and characteristics of those who voluntarily exclude themselves from the banking system and those who are involuntarily excluded would be of enormous benefit to policy makers in general and those considering the CBDC in particular.
Most draft target operating models for CBDCs currently envision a dual-rail structure in which digital fiat currency is distributed to citizens through accounts held at commercial banks with balances and liabilities held at the central bank. This may require a major overhaul if a large and growing proportion of citizens do not want bank accounts of any kind (which of course has other major implications for financial economics) and will strengthen the hands of those who are advocating for the introduction of token-based wallet or CBDC that digitally mimics cash and can be distributed by non-banks.
For the policymaker, the inadvertent exclusion of significant numbers of citizens and voters from increasingly digital payments and financial infrastructure is both inconvenient and socially undesirable. The CBDC’s “smart money” potential to help distribute welfare payments, for example, and the monetary policy benefits of universally digital account holders and taxpayers are seen as very valuable benefits.
But CBDC may be an expensive and complicated tool with which to break the nut of financial exclusion, which is often rooted in poverty, lack of education, and other physical and social disadvantages that need to be addressed. through different political tools. Central banks are powerful and CBDCs are exciting, but deep-rooted issues of financial exclusion can escape their healing reach.
Philip Middleton is Chairman of the OMFIF Digital Currency Institute.