All or nothing? Central bank digital currencies’ financial inclusion challenge

By on 05/03/2023 | Updated on 06/03/2023
Photo by Mark Morgan via Flickr

CBDCs are widely seen as having the potential to improve financial inclusion. Ian Hall reports on a webinar exploring technical, practical and public policy considerations

Governments have growing interest in the possibilities of central bank-issued digital money (central bank digital currencies – CBDCs), which are live in a small but growing number of territories worldwide.
The Bahamas was first out the blocks, launching its Sand Dollar in 2020. The Eastern Caribbean Central Bank (ECCB), the monetary authority for eight island nations including St Lucia and Grenada, began to roll out DCash the following year. CBDC projects in some of the world’s most populated nations include China’s rollout of the e-CNY (or ‘digital yuan’) and Nigeria’s eNaira.

Other major nations and authorities, for example Canada (for a potential digital Canadian dollar), the European Central Bank (for a potential eurozone digital euro), and the Bank of England (for a potential digital pound) are treading more cautiously: researching, consulting and, in an increasing number of cases, experimenting – but stopping short of committing to full issuance.

Financial inclusion is one motivation to issue a CBDC. At a global level, financial inclusion was included as one of the G7’s CBDC public policy principles (published in 2021), and the Bank of England’s five ‘core principles’ for CBDC (also published in 2021) stated that financial inclusion should be a prominent consideration in a potential digital pound’s design.

With financial inclusion a major challenge for all governments, Global Government Fintech – the sister title of Global Government Forum – convened a webinar on 7 February 2023 to ask ‘Can central bank digital currencies help tackle poverty?’. Panellists from the Bahamas, the Eastern Caribbean and Canada explored areas including CBDC design and take-up challenges, as well as how a CBDC interlinks with other public policy and state digitalisation initiatives.

Bahamas backs the Sand Dollar

The Sand Dollar was born out of the Bahamas’ Payments System Modernisation Initiative, launched 20 years ago and whose aims include boosting access to financial services and financial inclusion.

There are a growing number of unbanked and underbanked individuals across the archipelago nation (which has a population of about 400,000), the Central Bank of the Bahamas (CBB)’s project manager for digital currency implementation, Kimwood Mott, told the webinar audience.

“There has been a huge reduction in access to basic financial services because of the removal of brick-and-mortar banks,” he said, referring to “entire communities basically keeping their entire savings” in cash, potentially even under their mattresses – off-grid savings that are also uninsured.

“We [the Bahamas] have a portion of our inhabitants that are basically undocumented and [yet] they do operate in the commercial space, collect salaries etc, predominantly in cash. Most banks will require some sort of KYC [know-your-customer compliance checks], some sort of national documentation in order to open up accounts. Unfortunately, these individuals can’t [provide that],” he said.

Read more: What’s next for how governments use fintech?

He described “non-discriminatory access” as among the key factors of the Sand Dollar’s design, albeit that (as with any CBDC) a mobile phone is a prerequisite. The CBDC, he said, gives people the opportunity to become financially included as it’s “not discriminatory” and “without any particular form of KYC” for the lowest-tier digital wallet.

“A child, a visitor [tourist], a non-documented migrant – they all operate in a space where cash can be traded for goods and services. We made sure that the Sand Dollar itself had no discrimination [and that] once you have [a] mobile device, and can find at least the minimal amount of KYC, you should have access to the Sand Dollar the same way you have access to cash,” he said.

Read more: Bahamas central bank shares CBDC lessons from Sand Dollar’s first two years

Eastern Caribbean puts faith in DCash

For DCash – the first CBDC to launch within a currency union (the Eastern Caribbean Currency Union – ECCU) – financial inclusion is also an important objective.

The ECCB, where current work priorities include a data collection exercise to understand the size of the unbanked/underbanked population, has a “very ambitious” target of cutting cash use by 50% by 2025.

“Our islands are very cash-centric,” said Sharmyn Powell, who is the ECCB’s chief risk officer and also chairperson of the central bank’s fintech working group. “Sometimes it’s very difficult to reach persons with cash – this is a risk in itself. With a CBDC, you bridge that gap, you can reach persons who probably wouldn’t have been reached originally.”

DCash was seen as potentially having a role in helping rebuilding efforts after the eruption of the La Soufrière volcano on St Vincent in April 2021. The ECCB promoted DCash’s rollout via a marketing campaign that proclaimed ‘Rebuilding SVG [St Vincent and the Grenadines] One Digital Payment at a Time!’. “We had persons who weren’t able to get to the capital in some instances to access their funds via ATMs,” Powell said. “But if you have a central bank digital currency, you can still continue to transact.”

Read more: Eastern Caribbean nations roll out blockchain-based digital currency

Interest in CBDCs, particularly in advanced economies, appears to be driven mainly by payments efficiency as well as financial stability considerations. But Powell made the point that the former factor has crossover with financial inclusion. Factors such as the cost (for example, bank fees), speed and also security of conventional payments (within and between countries) can directly lead to financial exclusion, she said. “Persons were deterred from making transfers because of the high costs, and also the settlement speed. People were frustrated,” she said.

“We are hoping that through the use of DCash, new types of financial services [will be] offered by commercial banks, credit unions could expand using the DCash platform and offer new services – additional services that can benefit the population as a whole,” she said.

Canada aims for ‘universal access’

The two main scenarios driving interest in a potential Canadian CBDC are the possibilities of a cashless economy and “widespread usage of alternative digital currencies”, explained Bank of Canada’s senior special director for fintech Scott Hendry (who emphasised that he was speaking at the webinar in a personal capacity).

The first scenario, should trends continue, created “the possibility of a cashless economy where people can’t access central bank money, and there could be some significant hardship that comes from this… because some of the last people who use cash could easily be the poorest among us”, he said.

About 99% of the Canadian population is “banked”, he said, but the underbanked population is more sizeable. “There are many people who have a bank account but don’t really use it to its fullest extent, for various reasons,” he said.

Read more: ‘An unparalleled opportunity’: experts discuss the potential for digital ID to unlock fintech in government

There are also localities that are “becoming less banked”, Hendry said, adding these are often also locations where internet accessibility can also be more problematic.

He spoke of the “notion of universal access – that everyone has the right of access to central bank money”. The Bank of Canada has run “a number of projects… to make sure that if we put out a CBDC, it’s something that everyone could use. Now, that doesn’t necessarily mean that it’s all available at day one. But it is the goal towards which we would have to build”.

Directly addressing the webinar’s overarching question, he said that he “did not necessarily view CBDC as a tool for directly addressing poverty”. “It’s a tool for inclusion, or especially to make sure that digital exclusion doesn’t get promoted, as the economy [becomes] more and more digital,” he explained. “I think it’s incumbent on us to evolve our product [money], so that it can be part of the future, as opposed to just decline over time.”

Read more: Canada to consult on CBDC in 2023

‘Counteracting’ bank branch closures

One of the big challenges facing CBDC designers worldwide is offline access.

“Offline solutions is something that we had to address, understanding that we live in a hurricane belt – there are times where communications may actually go down and you still need the CBDC,” Mott said (the Sand Dollar is viewed as a tool that can be used for “national security purposes and social services after a natural disaster”).

Hendry pointed out that Canada, too, occasionally faces “natural disaster issues” – including in urban areas (for example, winter storms causing electricity outages in capital city Ottawa).

Mott highlighted the advantage Sand Dollar usage to business-owners who find themselves having to physically carry large volumes of cash (even flying from one Bahamas island to another with it – often because of branch closures – to make a deposit).

“If it becomes more and more expensive just to operate a business, there’s a possibility that the business has to downsize or even close, and that in itself can increase among the poverty rate,” Mott said, describing the CBDC as a “positive instrument to counteract” bank branch closures.

Read more: Bahamas ‘Sand Dollar’ CBDC put to use for payroll

From a technical perspective he emphasised the importance of achieving interoperability with the traditional banking system (in the Bahamas, a “two-way linkage” was set up through the Bahamas Automated Clearing House). “We have the ability to tie a Sand Dollar wallet directly to a bank account, [and so] somebody operating in the commercial space can transact, have funds collected in CBDC, pay staff salaries in CBDC, pay vendors and other suppliers in CBDC and/or convert the CBDC directly back into fiat… so from a cashflow perspective, they don’t have to wait two to three days for a cheque to clear or for funds to actually settle,” he explained.

The ‘basic’ phone challenge

One audience member asked whether people in the Bahamas and ECCU nations are able to access CBDC via ‘feature’ (basic) mobile-phones.

Mott gave a self-acknowledged “yes and no” answer, saying the question had crossover with the challenge of achieving offline transactions. The central bank, he said, “recognised” the incompatibility of “low-end” smartphones with offline services.

“There are chips that can be attached to the SIM [card],” he said. Through this, he said, “the SIM can operate as the NFC [near-field communication] device. If you look at that particular solution, and again – it still is tied to offline transactions – that would be a possibility for those low-end cellphone 1.0s to be able to transact”.

But he added a caveat. “There’s still the need for the application. If the phone isn’t smart enough to at least have that application built in (this is a non-smartphone ‘talking to’ another non-smartphone), I don’t think it will be achievable. So, while there are possibilities, I believe […] we will find ourselves in a place where there’s a need to upgrade.”

Read more: CBDCs’ financial inclusion potential examined in World Bank-BIS paper 

For DCash, the answer was “currently” negative, Powell said. But it is a “consideration in terms of future developments”, alongside offline solutions to better enable DCash where internet reliability is “sketchy”.

Bank of Canada research has stated that a CBDC could be used through a dedicated ‘universal access device (UAD)’ (described in a 2020 staff analytical note as a “custom device that is engineered for universal access while securely storing and transferring a CBDC” and that “should be manufactured at a low cost and issued by the Bank to ensure maximum inclusion”).

“It’s a theoretical concept at this point, it’s not something that we’ve actually built. But we’ve done some design work to investigate various possibilities,” Hendry explained. “Basically, the idea is that not everybody has a smartphone. There’s other types of phones – we would have to figure out how a CBDC could work with those. But not even everybody has those. So, we need to figure out how everyone could possibly access [a CBDC].” There are “quite a number” of possibilities and solutions could be designed differently “to serve different populations”, he said.

In terms of feature phones specifically, Hendry pointed out that M-Pesa (the mobile-phone-based money transfer service that has expanded from Kenya), works through SMS messages. “So, it is feasible to do this sort of thing on feature phones,” he said.

Governments’ use of CBDCs

Tackling financial inclusion is, of course, primarily a public policy matter for governments, as opposed to central banks. The possibility of governments themselves using a CBDC, for example for welfare payments, is an emerging area of interest.

Government agencies in the Bahamas have been running pilot programmes in this area.

“There are a lot of benefits from using digital money from a collections perspective,” Mott said. “But we’ve also been talking about disbursements. There’s a huge cost, and security elements, surrounding transportation of cash 1,000s of miles across the ocean. Being able to press a button and distribute hundreds of thousands of dollars within seconds to multiple recipients all over the archipelago is a great advancement.”

He placed the Sand Dollar’s development in the broader context of the Bahamas government’s development of its own e-payment platform for cashless transactions across all government agencies (‘DigiPay’), as well as a national digital ID programme. In addition, state authorities can help with technology infrastructure-related considerations around, for example, local wi-fi bandwidth, he said. “Through all of these different channels, we’re looking to get cohesion and synergies,” he explained.

Read more: DCash resumes service with government to consumer payments on agenda 

DCash is also under consideration as a disbursement channel as Eastern Caribbean administrations look to shift payments away from cheques. Government payments are envisaged as being an important part of a “major push towards adoption”, Powell said.

Growing use cases to encourage take-up

In summing up, Mott returned to his earlier point about the breadth of organisations that need to be included in delivering a CBDC.

“When you talk about inclusion, a lot of people just focus on the actual end-user. But you have to look at all of the major stakeholders that create the ecosystem,” he said. “We think about every touchpoint of a physical dollar bill. You have to see how this can become a digital token and see whether or not the technology and infrastructure lend themselves to a particular environment, and also [look at] the target audience – you can’t just use broad strokes to try to apply this to every particular scenario. This is not a one-size-fits-all solution.”

Powell, who has served the ECCB for more than 25 years, was asked how she would describe DCash compared to earlier (pre-CBDC) innovative initiatives. The CBDC’s rollout was, she responded, “one of the most challenging projects we have embarked on simply because of the whole issue of change”.

DCash’s launch had, she said, been complicated by factors ranging from COVID-19’s impact through to people confusing CBDC with private-sector cryptocurrencies (a point also made by Mott).

Read more: AI-powered government finances: making the most of data and machines

A CBDC must be easy to use, accessible to people who struggle with technology and “readily available”, Powell said. “You must be able to use it for your groceries, medication, your bakery products, your gasoline,” she said, adding that central banks “have to make a deliberate effort to build use cases for CBDC to be efficient in limiting poverty, if we are to meet our objectives”. When there are “sufficient” use cases, these can be promoted and people can more easily “see the benefit”.

“I think the main lesson is to include everyone,” Hendry concluded. “We need to make sure that everyone is included in the economy, and [if Canada were to proceed with a CBDC] that we do it in a way that the CBDC can help promote even more inclusion.”

As more and more nations commit to CBDC pilots and issuance, mainstream headlines are unlikely to focus on the unbanked and underbanked. But some of the trickiest obstacles – and also some of the most significant opportunities – facing CBDC design and rollouts are playing out precisely here.

Read more: ‘Seven out of 10 – maybe higher’: Bank of England deputy on ‘Britcoin’ likelihood

The webinar ‘Can central bank digital currencies help tackle poverty?’ – hosted by Global Government Forum’s sister title Global Government Fintech, was held on 7 February 2023. You can watch the full webinar via our dedicated events page.

About Ian Hall

Ian is editor of Global Government Fintech a sister publication to Global Government Forum. Ian also writes for media including City AM and #DisruptionBanking. He is former UK director for the pan-European media network Euractiv (2011-2018), editor of Public Affairs News (2007-2011) and news editor of PR Week (2000-2007). He was shortlisted for ‘Editor of the Year’ at the British Society of Magazine Editors (BSME) Awards in 2010. He began his career in Bulgaria at English-language weekly the Sofia Echo. Ian has an MA in Urban and Regional Change in Europe and a BA in Economics, both from Durham University.

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