Does Your Country Really Need Digital Cash?

Nine out of 10 central banks are exploring electronic versions of physical cash, according to the Bank for International Settlements’ 2021 survey of monetary authorities released this month. Nearly everyone, it seems, is convinced that the future of money is digital. While that might be right, does every country need to be on the bandwagon just yet? Not really. Whether you’re Poland or Peru should make a big difference in deciding just 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% in North America, 19% in the Asia-Pacific and 27% 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 may become “more of a theoretical construct than a daily experience,” in the words of the European Central Bank’s Ulrich Bindseil and others. 

That could be problematic for financial stability, especially if lightly regulated private-sector tokens like 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.

Luckily, this isn’t a universal problem yet. Cash continues to dominate the payment scene in Latin America, the Middle East and Africa, according to the FIS Worldpay Global Payments Report 2021. It’s unlikely to disappear soon even in some highly developed economies like 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 may help answer that question.

Both are emerging markets according to MSCI Inc., though the central European nation’s per capita income of $15,000 is two-and-a-half times that of the Latin American country. Both 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. (Up until the 1980s, authorities printed a special legal tender against dollar deposits. These “bony” notes could be used for everything from American cigarettes and Japanese cameras to clothes from Western Europe but had no value outside Poland.) Peru entered the new millennium with 80% of bank deposits denominated in dollars. 

But while both Poland and Peru are counted as success stories of de-dollarization, their retail financial landscapes look very different. Poland spent the 90s reforming its currency management, and eventually won the population’s trust in the zloty, both as a medium of exchange and as a store of value. Peru’s mountainous topography has made things more complicated. Dollar bills (and bank deposits) are still very much a part of the country’s bi-monetary system. Financial inclusion hasn’t progressed sufficiently, especially in rural areas.

Almost 9 in 10 Polish adults have bank accounts; only a little over 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 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% of gross domestic product, from 7% in 2018.

Given the surfeit of choices for consumers, Polish authorities don’t 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 monetary authority wrote in a paper included in a recent BIS study of attitudes to CBDCs in emerging economies. In Peru, on the other hand, 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 hasn’t made up its mind yet about digital cash, but it’s not ruling it out either. “In the medium term, we foresee that some payment flows could be improved by introducing a domestic CBDC,” its central bank officials wrote for the BIS study. 

For instance, 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 — won’t require an expensive visit to a bank branch. In rural areas, the robbery risk associated with exchange of physical bills will be reduced. If anonymity of cash is preserved, people may prefer to transact using CBDCs. There won’t be long queues to buy prepaid cards of different operators if the 80% of Lima’s population that travels by bus could pay for the rides using CBDCs. Rural migrants working in the capital city will be able to send money home in a cost-efficient manner.

Before committing themselves to digital cash, emerging markets need to ask themselves if they’re closer to Poland or Peru. If the private sector in their country can’t or won’t provide high-quality, interoperable payments solutions at a reasonable price to everyone, then central banks need to step in early — to both 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. Previously, he worked for Reuters, the Straits Times and Bloomberg News.