The global push for central bank digital currencies (CBDCs) faces a compelling challenge: the need for private sector collaboration to ensure their widespread adoption, Nikkei Asia reported 26th of October.
According to the report, CBDCs have emerged as a potential alternative to fiat and other digital currencies to increase financial inclusion and increase efficiency in the global monetary system.
However, their success appears to be closely linked to strategic partnerships with existing private payment systems, a lesson learned from the experiences of China and Cambodia.
Slow adoption
China’s ambitious rollout of the digital yuan attracted a lot of attention. However, despite extensive testing in 26 areas in 17 provinces by the end of 2022, the currency’s usefulness remains limited.
According to the report, most people choose to convert their digital yuan into traditional currency for everyday transactions due to the lack of integration with retailers and payment systems.
The adoption rate is further dampened by the lack of interest accrual and investment opportunities, making CBDCs less attractive to the average consumer.
Despite government pressure, the digital yuan made up only 0.1% of the total yuan supply in December 2022 – about $1.86 billion.
The slow adoption rate is mainly attributed to competition arising from private sector digital payment systems such as Alipay and WeChat Pay, which are deeply entrenched in the daily lives of Chinese citizens.
Chinese authorities have wised up and have taken significant steps to integrate the digital yuan with platforms like Alipay and WeChat Pay. However, disrupting the entrenched dominance of these private sector giants will require a gradual, sustained effort, the report said.
Meanwhile, Nigeria’s eNaira – launched in 2021 – has similarly struggled to gain traction with the population. However, unlike the Chinese, who prefer fiat money, Nigerians are increasingly turning to Bitcoin and other cryptocurrencies as their preferred method of exchange.
An International Monetary Fund report recently found that 98.5% of eNaira wallets remained inactive on a weekly basis, despite the CBDC having been inactive for several years. Similarly, the Bahamian sand dollar, one of the first CBDCs launched in 2020, made up less than 1% of the Bahamas’ circulating currency at the end of 2022.
CBDCs, which are fundamentally designed to co-exist with private sector financial services, face hurdles in driving adoption. They miss the promotional benefits that commercial banks offer. Therefore, collaboration with the private sector is emerging as the linchpin for success.
The Cambodian success story
Cambodia provides an instructive case study. The country introduced Bakong, one of the first CBDCs, in October 2020.
Initially, it faced challenges similar to the digital yuan, with entrenched QR code-based private sector platforms. However, the landscape changed dramatically with the introduction of KHQR, a standardized QR code payment system that facilitates the integration of the CBDC with current private sector payment platforms.
As a result, the number of Bakong users rose to 8.5 million by the end of 2022, with 1.5 million merchants accepting the digital currency. The CBDC is expected to reach a penetration rate of 60% to 70% in the near future.
President Kazumasa Miyazawa of global technology company Soramitsu, co-developer of Bakong, said Bakong’s growth trajectory has shown that private sector collaboration is critical to driving CBDC adoption.
The public will only want to use CBDCs if they offer the same convenience and benefits as the private payment systems currently operating.
Global interest
A recent survey by the Bank for International Settlements shows that more than 90% of the 86 central banks surveyed are actively involved in CBDC-related work, underscoring the global interest in this digital currency.
While challenges remain, experts emphasize that issuing a CBDC is just the first step. A comprehensive framework for CBDC evolution over a five- to ten-year period is imperative.
The experiences with the Chinese Digital Yuan and the Cambodian Bakong highlight the importance of balancing public and private initiatives to catalyze the adoption and utility of CBDCs in today’s evolving financial landscape.