What can CBDC do for emerging markets: a case for mobile money

Central banks have started to actively explore central bank digital currency (CBDC) – a new digital form of legal tender that mimics cash. Our initial note “The benefits and potential risks of digital fiat currencies” highlighted that CBDC may:

• enhance the efficiency of national payment systems
• ease the convenience of payment processes through mobile phones as primary financial service instruments
• encourage the broad digitisation of traditionally cash-based societies

The note also found that, if implemented incorrectly, CBDC could undermine the financial stability, security and inclusiveness of an economy.

Use cases of CBDC for financial inclusion

To assess the use cases of CBDC for financial inclusion and understand its implication, this note seeks to reduce gaps in the literature by assessing the potential positive, negative or neutral effects that CBDC may have on existing mobile-money schemes. Mobile money has been a key enabler of financial inclusion and the uptake of digital financial services, especially in sub-Saharan Africa. Given that a viable CBDC will most likely run on existing payments rails (such as mobile money), it is important to understand how mobile money can facilitate CBDC without negatively affecting financial inclusion.

Key findings

Key findings suggest that mobile money may be a positive use case for CBDC, but it is not without potential risks. The application of retail CBDC to mobile money has the potential to foster greater interoperability, improve payment efficiency, facilitate cost-saving gains by minimising reconciliation complexity and notional costs, as well as reduce the key payment risks that are typically associated with mobile money.

Furthermore, if implemented appropriately, CBDC can encourage trust in mobile financial services and ease the liquidity constraints of mobile-money agents.

If implemented incorrectly, CBDC risks not only exacerbating contextual inequalities, but also intensifying the perceived complexity of mobile money and exposing certain unstructured supplementary service data (USSD) providers to cyber-security threats.

This work forms part of the Risk, Remittances and Integrity programme, a partnership between FSD Africa and Cenfri.