Can CBDCs be a good alternative to cash?

• The Managing Director of the IMF stated that CBDCs could effectively replace cash.
• 130 countries are exploring the concept of CBDC.

In a recent speech at the Singapore FinTech Festival on the 15th of November, Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), expressed her perspective on the role of Central Bank Digital Currencies [CBDCs] in economies.

Some institutions, such as the European Central Bank (ECB), have maintained that CBDCs won’t replace physical cash. However, Georgieva’s remarks suggest a more nuanced perspective, indicating that such a transition could be beneficial for certain economies.

CBDCs advocated for cash evolution and financial inclusion

During her speech, Georgieva emphasized the cost-effectiveness of CBDCs in island economies, where distributing physical cash is a cumbersome process. She pointed out that CBDCs could also contribute to the resilience of more advanced economies.

Additionally, Georgieva underscored the potential for CBDCs to improve financial inclusion. This is especially true in regions where a significant portion of the population lacks access to traditional banking services.

Despite acknowledging the current uncertainty surrounding CBDC applications and the relatively low adoption rates, Georgieva encouraged innovation in this space. She emphasized that it is not the time to step back.

Moreover, she urged the public sector to continue preparations for deploying CBDCs and related payment platforms in the future.

Georgieva further advocated for designing these platforms with a focus on facilitating cross-border payments. Currently deemed expensive, slow, and accessible to only a few, cross-border transactions could significantly benefit from the integration of CBDCs.

While the Bank for International Settlements (BIS) and other financial institutions have called for countries to establish relevant legislation supporting CBDCs, major jurisdictions have yet to make definitive decisions on their issuance.

Georgieva echoed the recent comments by BIS Chief Agustin Carstens, asserting that CBDCs will play a central role in financial innovation. The private sector is expected to contribute significantly to their market presence.

In her closing remarks, Georgieva suggested that country authorities interested in introducing CBDCs should adopt an entrepreneurial mindset.

She stressed the importance of effective communication strategies and incentives for distribution, integration, and adoption, emphasizing their equal significance alongside the design considerations.

Government-issued stablecoins inch closer to reality

A significant global shift toward CBDCs is underway, with 130 countries, representing 98% of the global GDP, exploring the concept. This marked a substantial increase from May 2020 when only 35 countries were considering CBDCs.

Currently, 64 nations are in advanced stages of exploration, including development, pilot phases, or even CBDC launches. Among the G20 nations, 19 are now in the advanced stages of CBDC development, with 9 already in the pilot phase.

While the progress on retail CBDC in the United States has stalled, other G7 banks such as the Bank of England and the Bank of Japan are actively developing CBDC prototypes.

The European Central Bank is gearing up for a digital euro-pilot, and more than 20 other countries plan to take steps towards piloting their CBDCs in 2023.

Countries like Australia, Thailand, and Russia are committed to continuing their pilot testing, while India and Brazil are aiming for CBDC launches in 2024.