CBDC, cash and fast payments: the view from the IMF meetings

“As technology moves, we have left shells and gold and copper coins and the like behind us. And we’re now slowly getting out of notes and physical money altogether into the digital world,” Cecilia Skingsley said at the International Monetary Fund and World Bank meetings.

Skingsley, head of the Bank for International Settlements’ Innovation Hub, was one of many to explore the consequences of the diminishment of cash at the annual meetings last week. IMF chief Kristalina Georgieva compared central bank digital currency (CBDC) to a new fleet of ships built for choppier waters. “They open up new possibilities,” she said.

Others see CBDC as a tool for financial inclusion. “If designed and implemented with inclusion in mind, CBDCs could offer many options to expand access to the underbanked and to serve the vulnerable and the poor,” said Queen Máxima of the Netherlands, the United Nations secretary-general’s special advocate for Inclusive Finance for Development.

“If designed properly, CBDCs could hold great promise to help support a digital financial system that works for everyone. But that is an important ‘if’,” she said.

Despite the advance of digital payment methods, consumers sometimes prefer cash, Georgieva noted. “We need to understand that,” she said. She suggested it will require education to convince people of the improved safety of digital payments.

Bo Li, deputy managing director at the IMF, said “targeted policy functions” such as food stamps, consumption coupons and welfare payments are examples of programmable smart contracts that could be included within CBDC.

But CBDC is not a panacea, said Li. It needs to work in tandem with other policies to improve financial inclusion and protect privacy. “If you don’t protect data privacy, you’re going to lose trust,” he said.

CBDC tests in Africa

Michael Atingi-Ego, deputy governor of the Bank of Uganda, said without a law yet drafted to govern CBDC, work on digital money has been slow in his country. The private sector needs rules and regulations to operate, he said.

In Zimbabwe, digital money has transformed tax collection, said Mthuli Ncube, minister of finance. Electronic payments are “fantastic for tax collection,” he said. “All the data is there.”

The Bank of Ghana learned much from its recent CBDC pilot, said governor Ernest Addison. The central bank’s role helped build crucial trust in the product. But Addison said taxation in Ghana proved more difficult than in Zimbabwe. He said the citizens were loath to accept a digital tax on all transactions.

Most businesses are operated informally in Zimbabwe making it difficult to collect taxes, Ncube acknowledged. He highlighted central bank plans to use landlords as tax collectors, to bring in small fees from informal businesses. Ncube said when implementing a digital tax, it can be helpful to reduce a tax elsewhere which is more difficult to collect.

P2M in Latin America

“To develop the P2M, we have to develop the P2P,” said Eduardo Torres-Llosa, general manager of the Central Reserve Bank of Peru, referring to person-to-merchant and person-to-person payments.

“And to develop the P2P, we have to achieve the massive adoption which I think by the way is the main risk,” he added.

Torres-Llosa said that despite the risks of proceeding, there is also a reputational risk to doing nothing. “We hope it will take less than ten years,” he said. “That is our intention.”

Diego Labat, president of the Central Bank of Uruguay, said monetary sovereignty is at stake when it comes to CBDC. He said central bankers need to take proper care of the currency to prevent currency substitution.

“We are working with the central objective of having a fast payment system platform with the best existing standards. And this is probably the reason we have delayed the CBDC programme,” said Labat. “For us, they are not contradictory. I think that CBDC could be implemented with a fast payment system.”

He pointed to the Brazilian payment system Pix as a regional leader. The BIS’s Skingsley also praised Pix. “It was a phenomenal onboarding,” she said. “People could start to transact with one another much safer than using cash.”

There is already strong appetite for digital assets in Latin America. Demand for products like US dollar stablecoins is huge, said Labat. The Central Bank of Uruguay has warned consumers about fraud and malpractice online and is also concerned about the use of digital assets for money laundering. Stablecoins have created cheaper means of exchange, however, Labat noted.

Barriers exist beyond the public sector, argued Torres-Llosa of the Peruvian central bank. “The lack of interoperability is a major, major barrier,” he said. Peru recently rolled out legislation that mandates payments interoperability.

But cross-border payments remain challenging. One idea, a single currency for the region, is “not impossible” but it is a “utopia”, said Labat. “I think probably it is not the optimal solution.”

“The integration of our payment systems is a big, big opportunity,” he said. “We mustn’t miss it. It must be our goal.”