Why might people use a Central Bank Digital Currency?
Central banks around the world are increasingly looking to develop Central Bank Digital Currencies (CBDCs) as the use of cash dwindles and people turn to third party providers of payments and new forms of money.
This is bad for central banks as it threatens both their monetary sovereignty and their means of promoting financial stability. Moreover, in the case of a natural disaster it’s hard to move money around if there is little cash in circulation.
Even central banks that are not particularly worried about these problems are investigating CBDCs. Why? If a large economy such as the USA or the European Union introduces a CBDC they may be forced to follow suit in order to aid interoperability.
In August Anette Broløs and I attended the CBDC Conference in Frankfurt to launch our reports on payments and the future of CBDCs in Brazil, along with our client, SICPA. The conference was surprisingly (and pleasingly) user-centric, with many cases presented by central banks on pilots and a few actual implementations.
We learned that central banks face a critical problem: a CBDC will be of little use if people cannot be persuaded to use it. And early experiments in CBDCs, including the eNaira in Nigeria and the sand dollar in the Bahamas, indicate that people are not adopting CBDCs in droves. In the first seven months after its October 2021 launch, the eNaira app was downloaded just 800,000 times, and fewer than 100 merchants were accepting it.
After three days of presentations, my conclusion was that user uptake depends very much on: a) the characteristics of the financial system (such as access to low-cost and instant transfers); b) local particularities that foster use cases (such as difficulties transporting cash), and last but not least, the preferences and habits of the users themselves.
The Bahamian Sand Dollar is an interesting case. Launched in October 2020, it was one of the world’s first CBDCs. According to conference speaker Shaqueno Porter, the Central Bank of the Bahamas, was partially motivated to launch a CBDC by the archipelago’s geography. Moving cash around the islands was challenging, particularly in the event of a hurricane. Moreover, commercial banks had left some islands completely, meaning that people were increasingly unbanked and facing difficulties accessing either digital banking services or cash.
Yet despite this clear use case, reported Porter, adoption remains low for both consumers and merchants. Why? There appear to have been a range of issues, some of which the Central Bank is addressing. First, it was not possible to transfer funds directly between a bank account and a sand dollar account. Second, a lack of offline capability may have impacted uptake, given that the CBDC stands to be most useful in places where infrastructure is lacking. Third, merchants needed more training, and finally, the Central Bank’s marketing and branding campaign may not have reached the population effectively.
Achieving uptake is likely to be even more complex in diverse regions such as the European Union. In October 2021 the ECB entered an investigation phase for a possible digital euro. With respect to users there is definitely much diversity, ranging from the very cash based economy in Germany to almost cashless economies like the Netherlands. The ECB have their work cut out for them.
The EU is incredibly diverse in terms of its economies, payments infrastructures and cultures. As things currently stand one can imagine that if a CBDC were introduced that behaves like cash (e.g. anonymous and offline) it might find a clear use in a cash-centric economy (such as Germany).
But why would, say, the Dutch use a CBDC? The Netherlands has long had instant transfers and people use little cash. It is unlikely that the CBDC will find one clear rationale for users that holds across the entire EU.
Our research on payments in Brazil suggests that there are many reasons why people might adopt a CBDC, but they will find their own uses for them. Incredibly, 40% of the low income people we interviewed had three or more bank accounts, and they were adept at using other payment platforms such as MercadoPago and Pix as well. They combined services in order to lower transaction costs, increase their perceptions of personal security, and achieve practical ends. How they did so was remarkably individualized: people had very personal rationales for how they made decisions.
While there is no one clear use case for a CBDC in Brazil, it is easy to imagine Brazilians coming up with a range of ways to deploy CBDCs to make their lives easier (and cheaper), particularly given how quickly Brazilians adopted the payment system Pix. We suspect that this may well be true for most countries.
More evidence in favour of a flexible design is emerging from MIT’s Digital Currency Initiative. They have carried out CBDC research in four different countries (Mexico, Nigeria, India and Indonesia) on how people use financial services with a view to developing design insights for CBDCs. Finthropology is assisting with the analysis. One striking finding so far is that people invent an incredible array of workarounds for instances in which the payment system fails. Another (which lines up with our Brazil research) is that people often share bank accounts and wallets with family and friends.
So, rather than design a CBDC to fulfil a range of generic functions, it would be helpful to introduce a solution that solves one or more important pain points (like P2P payments; offline payments, shared accounts) for the target population and be ready to update it as people's financial practices evolve. This might include offering CBDCs with different features; for example, in terms of online/offline capability, the possibility to have one wallet owned by several people. It would also be helpful to time the introduction with major trading partners or neighbouring countries to provide ease of use both domestically and across borders.
In short, people are highly flexible and adaptive in how they use financial services. The policy makers and designers working on CBDCs would do well to take advantage of this affordance. First and foremost, however, they would do well to study how and why financial choices are made and what challenges people meet whether with regard to connectivity, income or trust. We recommend looking at the relatively few studies already made in this area or to undertake new ones with country researchers. At Finthropology we would be welcome being part of such initiatives.
You can access the short report on our research at SICPA’s website, and the full report via Finthropology’s website:
Insights for CBDC Design and Adoption (short report, SICPA website)
Money and Payments in Low Income Brazil (full report, Finthropology website)
For more information contact Erin (erin@finthropology.com).
