CBDCs, fundamentally designed to coexist with private sector financial services, face obstacles in encouraging their adoption.
The global push for central bank digital currencies (CBDCs) faces a compelling challenge: the need for private sector collaboration to ensure their widespread acceptance, Nikkei Asia reported on October 26.
According to the report, CBDCs have emerged as a potential alternative to fiat currencies and other digital currencies to increase financial inclusion and improve the efficiency of the global monetary system.
However, its success appears closely tied to strategic partnerships with existing private payment systems, a lesson learned from the experiences of China and Cambodia.
Slow Adoption
China’s ambitious launch of the digital yuan attracted considerable 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 daily transactions due to the lack of integration with retailers and payment systems. The adoption rate is further slowed by the absence of interest accrual and investment opportunities, making CBDCs less attractive to the average consumer.
Despite the government’s push, the digital yuan only accounted for 0.1% of the total yuan supply (approximately $1.86 billion) as of December 2022. The slow adoption rate is mainly attributed to competition from private sector digital payment systems such as Alipay and WeChat Pay, which are deeply embedded in the daily lives of Chinese citizens.
Chinese authorities have taken significant steps to integrate the digital yuan with platforms such as Alipay and WeChat Pay. Meanwhile, Nigeria’s eNaira, introduced in 2021, has also struggled to gain traction among the population.
CBDCs lack the promotional benefits that commercial banks offer. Therefore, collaboration with the private sector emerges as the key to success.
Cambodia’s Success Story
Cambodia offers an instructive case study. The country introduced Bakong, one of the first CBDCs, in October 2020. Initially, it faced similar challenges to the digital yuan, with platforms rooted in the private sector based on QR codes.
However, the landscape changed dramatically with the introduction of KHQR, a standardized QR code payment system that facilitates the integration of CBDC with current private sector payment platforms.
Consequently, the number of Bakong users increased to 8.5 million by the end of 2022, and 1.5 million merchants accepted the digital currency. 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 cooperation is critical to driving CBDC adoption. The public will only want to use CBDCs when they offer the same level of convenience and benefits as the private payment systems currently operating.
Global Interest
A recent survey by the Bank for International Settlements reveals that more than 90% of the 86 central banks surveyed are actively involved in CBDC-related work, underscoring the global interest in these digital currencies.
While challenges remain, experts emphasize that issuing a CBDC is just the initial step. It is imperative to have a comprehensive framework for the evolution of CBDCs over five to ten years.
The experiences of China’s digital yuan and Cambodia’s Bakong highlight the importance of balancing public and private initiatives to catalyze the adoption and utility of CBDCs in today’s changing financial landscape.
By Audy Castaneda
