This article explores how central bank digital currencies (CBDCs) could promote financial inclusion in the Pacific Islands. The Pacific includes countries “among the most remote and geographically dispersed in the world”, with great variability in access to services. basic infrastructure, such as electricity and internet access. Levels of internet use and financial literacy are very low. Most transactions in the region are made in cash, with larger transactions often paid using paper checks. The subsequent need to travel to financial centers to deposit and withdraw money is particularly costly in the many regions “with widely dispersed populations and mountainous or multi-island geography”.

In response, many Pacific island countries have launched electronic money (electronic money) services, “seeking to replicate rapid growth in regions such as sub-Saharan Africa or South Asia.” Eighty percent of Pacific central banks are engaged in some sort of digital currency work – often research or pilot testing. In Fiji, Samoa and Tonga, electronic money payments increased to represent 0.8%, 1.1% and 2.8% of each country’s GDP, respectively. Even as new users continue to sign up for e-money services, continued usage rates remain low.

One of the barriers to the use of electronic money is access to government-issued identification documents. For example, “It is estimated that 80% of the people of Papua New Guinea have no form of clear identification. This raises concerns about the scalability of CBDCs. Another obstacle to central bank issuance of digital currencies is that such programs would require funding to be reallocated to other tasks, such as combating money laundering and terrorist financing, which is essential for maintaining relations with banks abroad.

Among the issues to be addressed would be the permanent role of banknotes and whether the currency uses a “token-based” or “account-based” verification system. The token-based method works the same as cash in that the critical factor is whether the money is genuine. This can be verified using ‘a digital signature [as] used in public key cryptography. In an account-based design, however, there is a heavy reliance on verifying the identity of the account holder, just as in using a typical bank account. However, an account-based design would only be “feasible in places with strong identity verification systems and would generally require good internet connectivity and good use of smartphones.” For this reason, a token-based CBDC may be much more suitable for Pacific Islands. However, one of the downsides of token-based systems is that they are more vulnerable to illegal activity, such as money laundering.

Given these complexities, the authors conclude that “now is not the time for countries in the region to issue a CBDC, but now is the time to start developing expertise and understanding”. By taking a long time to prepare for such an effort, central banks might be able to develop systems capable of solving the “financial inclusion and remittance issues that plague the Pacific region”.

This is a summary of an article by Anton N Didenko and Ross P Buckley, published by the Asian Development Bank, August 2021, 40 pages, available at https://www.findevgateway.org/paper/2021/08/ central-bank-digital-currencies-the-potential-to-answer-the-financial-inclusion-challenges

By Arin Atluri, Research Associate

Additional resources

AfDB Home Page
https://www.adb.org/

MicroCapital article on bitcoin adoption by El Salvador
https://www.microcapital.org/microcapital-brief-el-salvador-plans-cryptocurrency-atms-chivo-app-kiosks-as-bitcoin-set-to-become-legal-tender-september-7/

More MicroCapital balance sheets
https://www.microcapital.org/?s=wrap

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