Digital currencies may not be a silver bullet for financial inclusion

Stablecoins and central bank digital currencies (CBDCs) may not live up to their promise of increasing financial inclusion and improving cross-border payments in emerging markets, according to a new report by the Bank for International Settlements (BIS).

Titled “What Does Digital Money Mean for Emerging Market and Developing Countries,” BIS claims digital currencies like stablecoins and CBDCs may create formidable issues in emerging markets and developing economies (EMDE) and fail to address problems that other fintech innovations are tackling.

“Stablecoin arrangements aspire to improve financial inclusion and cross-border remittances – but they are neither necessary nor sufficient to meet these policy goals,” the report’s authors said.

Several EMDEs have been looking to digital currencies to address weaknesses in their financial systems. By cutting out financial intermediaries, digital currency proposals aim to empower users and make domestic and international payments more efficient as the digital economy grows.

While digital currencies like crypto have grown in popularity, its high price volatility and scalability challenges have prevented it from being adopted as a mainstream means of payment. In response, stablecoins have entered the fray (which attempt to maintain a stable value relative to a fiat currency) along with digital central bank money.

EMDEs have increasingly turned to stablecoins as a store of value and are appealing in countries where local currencies are less stable and subject to capital controls due to inflation.

The BIS report questions whether stablecoins – which have not yet been tested at scale – could “offer lasting competitive advantages over rapidly developing, evolving digital payment services,” such as e-money, digital ID and mobile banking.

Instead, it could generate new risks related to governance, efficiency in payment processes, consumer protection and data privacy, the authors added.

On the question of CBDCs, BIS believes “there is a risk that in periods of systematic stress, [that] households and other agents may shift from bank deposits or other instruments into the CBDC, spurring a ‘digital run’ of unprecedented speed and scale,” and questioning how desirable or necessary they are for all jurisdictions.

The report concludes that existing fintech innovations like digital payment services may be more suitable to improve financial inclusion and enhance cross-border payments compared to stablecoins or CBDCs.

A recent BIS survey found that central banks representing a fifth of the world’s population say they are likely to issue a CBDC in the next few years, and many are already at the advanced stages running CBDC pilot programs like China’s digital yuan and Nigeria’s eNaira.