Emerging Market Monetary Authorities and Digital Currencies
Central banks in emerging markets (EM) require a combination of skilled monetary policy management and forward-looking embrace of financial technology to navigate current challenges and mitigate future waves of financial crises. In addition to being an effective tool to boost seigniorage and financial inclusion, central bank digital currencies (CBDCs) can mitigate or solve EM challenges such as: inefficient fiscal disbursements, exorbitant cross-border payments and remittances costs; the high costs of processing cash; revenue and tax collection; prudential regulation of sometimes fragile banking systems; and managing foreign exchange markets and currency reserves.
The benefits of CBDCs
As the digital version of central-bank-issued legal tender, CBDCs are of immediate benefit to those who need to send and/or receive money locally and/or internationally. Options for non-smartphone users (via USSD), the capabilities of offline transactions, and the fact that an account with a financial institution is not required, create pathways to financial inclusion for the world’s 1.7 billion unbanked citizens.
A central bank’s mandates include establishing monetary policy, managing fiat currency supply and reserves, and implementing prudential regulation to maintain economic stability. Cryptocurrencies, especially in developing countries, are making it challenging for the cental bank to fulfill these official mandates, as cryptocurrency assets, especially stablecoins, account for a growing percentage of the money supply and foreign exchange transactions. The central bank has limited or no visibility into these cryptocurrency holdings or flows, which impacts their ability to determine, implement, and optimize monetary policy.
The rapid growth of cryptocurrencies has created another challenge for EM central banks in the area of prudential regulation. The global cryptocurrency market cap was almost halved between May and June, from ~$1.7 trillion to ~$900 billon, and one of the largest stablecoins, TerraUSD, blew up and went to zero. Central bankers worldwide were acutely aware of the risk of broader market contagion during the delicate period of rapid inflation, policy rate interest hikes, and widespread risk-off anxiety. While contagion seems to only have affected crypto-specific firms during this meltdown (3AC, Celsius, Voyager and Babel, among others), central banks require tools to effectively incorporate quantitative crypto flows into their monetary policy calculus.
Bitt envisions that CBDCs and crypto will coexist within the world’s monetary system, though we agree with the Bank for International Settlements that CBDCs may replace stablecoins in many EMs. Some governments have already legislated cryptocurrencies as legal tender, to facilitate their central bank regulation, just as CBDCs will be. With US President Biden’s Executive Order, and the accompanying mandates, the world’s largest economy (the second highest for crypto holders) formally joined the discussion about safeguarding monetary sovereignty during the inevitable coexistence of CBDCs and digital assets.
Optimizing revenue collection
While many developing countries are migrating their tax filing to online, the citizen payment and refund process often involves face-to-face reconciliation. The Organisation for Economic Co-operation and Development (OCED) estimates that developing countries lose a significant percentage of their tax revenue from corporations, due to strategic business registration. In addition to the OECD’s 15-point plan to mitigate tax avoidance, CBDCs could streamline and expedite the payment and, wherever applicable, the refund of tax.
In addition to batch-disbursement, which can instantly issue legal tender to verified recipients (eliminating deceased or unqualified individuals), CBDCs also can be programmed for exclusive uses and for exclusive periods. With the World Bank and the International Monetary Fund predicting an ominous global economic downturn for the next 12 to 18 months, their respective governments are likely to issue support in the form of stimulus packages and/or welfare benefits. Distribution of fiat currency is often an arduous, expensive, (and sometimes dangerous) process that is fraught with human errors and the abuse of funds. A government or organization in a developing country, with a limited social assistance budget, could disburse CBDC that could only be spent on intended products and services.
Exports and imports
The global COVID-19 pandemic catapulted CBDCs to the forefront of considerations for the central banks, financial institutions, governments, and large businesses, in developing markets, as they were confronted with the expensive and cumbersome frictions involved with existing cross-border payment methods. At the macro level, wholesale CBDCs would eliminate delays and bureaucracy by facilitating instant interbank and cross-currency transactions and settlements via atomic swaps. As more assets are tracked on blockchain-based ledgers, atomic swaps will become more widespread bringing further efficiency and traceability for many commercial use-cases.
The digitization of the world’s monetary system is progressing at a rapid pace. The need for CBDCs among developing countries is arguably greater than within the 'G20’. Whether in large or small countries, single island-states or multinational currency unions, Bitt maintains its lead in the CBDC industry and continues to deploy CBDCs and stablecoins to the benefit of those who live in developing countries and emerging markets.