According to the Atlantic Council’s tracker, 17 countries currently have their Central Bank Digital Currency (CBDC) in the pilot phase and 11 countries have rolled it out, with several others in either research or development stage. Three key drivers of interest for the central banks around the world to propose CBDCs have been – increased financial inclusion, improved payment efficiency, and monetary policy and stability. However, for all the stated potential, the adoption rate from the demand side has been painfully slow and limited. Cases in point for this blog post are Nigerian digital currency eNaira, Chinese e-CNY, India’s e-Rupee, Bahama’s Sand Dollar, and Jamaican JAM-DEX.
The e-CNY and e-Rupee are still in the pilot phase and are limited to certain cities, whereas eNaira, the Sand Dollar, and JAM-DEX have been launched at the country level. However, all of these are facing similar setbacks – low adoption on both merchant and customer sides.
The e-CNY boasts the largest registered user base of 261 million (as of January 2022) with an outstanding transaction size of approximately $14 billion. The Chinese government has made continuous efforts to expand the scope of transactions for increased adoption. The use case has been broadened to include payments for different services such as payment for public transportation, income tax, stamp duties, and more recently an electronic version of red packets (hongbao), the traditional Chinese way of gifting money. They have also attempted to regulate competition from private market players, banned cryptocurrency and tried to enforce circulation by using an expiration policy.
Despite all of this, the end-user has neither additional benefits nor convenience to make a shift from existing apps like Alipay and WeChat, both of which have a sufficiently large user base and merchant integration. The incentives offered are not lucrative enough for the user to use it consistently. If this user survey is to be believed, e-CNY lacks “attractive promotions, discount coupons, and giveaways” for people to make a shift.
This narrative is not unique to China.
Indian banks are expressing similar concerns about the e-Rupee. According to them, it adds to the workload of the banks’ accounting process and offers limited advantages in tandem with Unified Payment Interface’s (UPI) payment rails. Banks are burdened with more work since the trade balance has to be settled individually for all cash, e-Rupee, and UPI transactions, making the process ineffective and inefficient. The attempt seems especially frivolous since both UPI and e-Rupee are Central Banks’ endeavors as opposed to competing private players like WeChat and Alipay in China. E-Rupee also doesn’t necessarily solve the problem of financial inclusion, which at this point appears to be conditional on literacy gap and distrust in the digital banking space.
In Nigeria too, in spite of the incentives of discounts, eNaira’s adoption has stagnated close to 0.5% as more Nigerians prefer private digital currencies. The eNaira offers no additional benefit but suffers from the fiat Naira’s declining status and valuation.
The Sand Dollar
The Sand Dollar uses distributed ledger technology and is pegged to the US Dollar. It was the first officially launched CBDC and yet has very little to show in terms of adoption numbers or use-cases. Only 0.1% of total currency in circulation in the Bahamas comprises Sand Dollar. Very few merchants accept it for payments. JAM-DEX too is in a similar situation where hesitance at merchant level is one of the main cited reasons affecting the overall adoption rate.
Why the low adoption?
Learning from the above mentioned cases, slow adoption of CBDCs can be broadly categorized under following main reasons:
1) Lack of Awareness: One of the reasons given by the Bahamas Central Bank for low adoption is the lack of awareness amongst citizens about the CBDC. They also claim that people often confuse it with cryptocurrency and are hesitant to use it especially in the wake of the FTX fiasco. The ignorance makes it difficult for them to see the value in using them.
2) Concerns around privacy and anonymity: The adoption of e-CNY and e-Rupee are particularly restricted by lack of clarity around privacy and anonymity rules but are not restricted to those two only. Lack of trust in the system or the Central Bank issuing the CBDC will significantly affect adoption. Since the financial data and transaction history will be linked to the user’s digital identity, people are especially cautious about using it for payments.
3) Habits and Behavior: Most countries already have an existing digital payment system or rely on the legacy of card networks. As such it is difficult to change those behaviors if the actual benefit of adopting a new system is unknown and there’s no clear problem with the existing system either.
4) Uncertainty around Benefits: It is still largely unclear what the CBDC has to offer. Despite the claims of financial inclusion and system efficiency, none of the use cases have demonstrated positive results for either of those.
As many have already pointed out, CBDCs appear to be a solution in search of a problem. Surrounded by challenges, the best-case scenario for countries testing it or planning to test it out would be to integrate it with existing payment systems and infrastructures instead of reinventing the wheel. Speculations around cross-border payment efficiencies are still to be tested but that will require interoperable norms and designs which in turn will need some standard setting exploration.
Many countries have shifted gears and are now exploring effective regulatory mechanisms for stablecoins for both domestic and cross-border payment settlements. This might be a more worthwhile effort considering that the systems already exist and are more efficient in practice, but comes with its own set of concerns that need to be sufficiently addressed. Most stablecoins currently are either pegged to the dollar or draw algorithmic value where smart contracts manage the token supply. But some like Tether Gold and DGX are also pegged to gold though these are still private currencies. Russia and the UAE are mulling over their own version of gold-backed stablecoins for trade and international settlements. The Hong Kong based company Red Date Technology, also responsible for China’s national blockchain project, has come up with a “SWIFT type infrastructure” Universal Digital Payment Network (UDPN) to bridge the gap between stablecoins and CBDCs.
The EU is not lagging behind either. The Markets in Crypto-Assets (MiCA) regulation is expected anytime in 2023 which will closely restrict the issuance and the use of stablecoins along with other crypto-assets.
What’s interesting and worth questioning now is the shape that the upcoming monetary competition will take. Will it be a race in the CBDC space to shift/maintain the dollar hegemony and lead the standardization effort or a race to regulate private currency like stablecoin or both? And what should be the US’s policy posture? We will be answering these questions in detail, in an upcoming whitepaper.
1 thought on “The Curious Case of the Missing CBDC Users”
The issue of the efficiency of settlements deserves more treatment. Legacy networks for both commercial and retail financial settlements often lag due to both technological and compliance reasons. A CBDC girded by immutable shared ledger technology might make settlements more efficient, or it may not depending on the ability of the network to process at speed relative to legacy methods. Is this also a solution chasing a problem? I suppose that depends on how often in legacy systems there are errors in settlement and what the mean times are, and if those have a measurable effect on the velocity of “money” that CBDC would improve. Go further upstream to central bank money markets as well to see what issues exist that CBDC either does or doesn’t solve, as well.