The envisaged role of CBDCs has varied across countries and this is reflected in different design choices. Since advanced economies are mostly concerned with payments safety and opportunities to improve the efficiency of cross-border payments, and are more likely to opt for a ‘wholesale’ CBDC. This has the potential to improve the efficiency of interbank payments and securities settlements. Banks interested in addressing financial inclusion challenges can be expected to consider issuing ‘general purpose’ CBDCs since these are broadly available to the general public for day-to-day use.
The Pacific islands include some of the world’s most remote and geographically dispersed countries. Despite years of effort, financial inclusion is a major challenge and many in the region still lack access to financial services due to geographic remoteness, limited digital infrastructure and insufficient financial literacy. These challenges are heightened by the progressive withdrawal from the region of two major Australian banks — ANZ and Westpac — and the general reduction in correspondent banking relationships globally.
CBDCs can offer a potential solution to the financial inclusion challenges of Pacific island countries and the problem of high remittance costs that currently serve as a tax on the earnings of Pacific Islanders abroad. CBDCs will also likely serve as a preferential alternative to private sector cryptocurrencies that some are seeking to develop and launch in the Pacific, which may prove more attractive than the current expensive remittance procedures. But the private sector cryptocurrencies are likely to come with high volatility and potential unreliability.
Today, cash remains the preferred payment method for most transactions in Pacific island countries. This requires the payer to travel to the financial centre, and is typically costly and time-consuming in a region with a highly dispersed population and mountainous island geography.
CBDCs can improve access to financial services by those in remote areas and reduce cash management costs. CBDCs can lower the cost of maintaining the supply of physical currency and protecting it against counterfeiting. They can also create benefits for private payment system operators by reducing bookkeeping, operational and payment reconciliation costs. Merchants may benefit from reduced cash logistics and individuals from minimised ATM withdrawal costs.
Although the opportunities for financial inclusion generated by CBDCs can be substantial, underlying challenges can also be significant. This is particularly so for Pacific island countries where the digital and financial infrastructure necessary to successfully implement the technology remain relatively undeveloped.
Effective implementation of CBDCs is conditional on the availability of required infrastructure, including electricity, internet and cellular network coverage, smart phone penetration, and digital ID systems. Some countries may already have in place established physical payments infrastructure that could be adjusted to accommodate CBDC integration. Others will need to develop it specifically for the CBDC.
As with any other types of currency, the level of implementation of a CBDC will depend on the level of trust, demand and understanding among users. In Pacific island countries, the roll-out of CBDCs will require additional consumer-centred programs focusing on financial literacy and awareness raising, the collection of feedback and complaints from end users, and consumer protection standards.
The establishment and operation of a CBDC by any Pacific nation will require considerable expertise and deep understanding of the design choices and issues to which this fundamentally new form of currency will give rise. Now is not the time to issue a CBDC in the Pacific. Development of a safe, efficient and accessible CBDC will require regulators to redirect scarce resources away from pressing challenges, such as enforcing anti-money laundering and counter-terrorism financing regulations and maintaining correspondent relationships with overseas commercial banks.
Instead, now is the time to develop CBDC expertise. Understanding such matters requires study and time for reflection to work through the policy implications. If well designed and implemented, CBDCs offer a genuine solution to financial inclusion and remittance problems. Now is the time to begin laying the groundwork for this potentially game-changing innovation by developing the expertise required within the region’s central banks.
Ross Buckley is KPMG Law – KWM Professor of Disruptive Innovation at the University of New South Wales.
Anton Didenko is Senior Lecturer at the University of New South Wales.