In a world rapidly evolving towards a digital future, the role of central bank issued digital currencies (CBDCs) is becoming increasingly important. When considering this ground-breaking development, it is essential to consider the impact, potential opportunities, and challenges that CBDCs pose.
The unbanked: a grave concern
Pakistan, like many other countries, faces significant challenges due to its large unbanked population. Surprisingly, only 21%[1] of adults have access to formal financial services. The reasons for this disparity are multifaceted, including geographical remoteness, low literacy rates, inadequate infrastructure, religious considerations, and widespread tax avoidance.
CBDC: A lifeline for the unbanked
The introduction of a CBDC has the potential to extend an economic lifeline to these underserved populations. Digital wallets are playing a vital role in bridging the accessibility gap to financial services and are poised to revolutionize the way people interact with money. This digital leap forward has the potential to significantly reduce the use of cash and improve overall transaction efficiency and transparency.
Addressing the undocumented economy
One of the root causes of many financial problems in Pakistan is the illicit economy. A significant portion of economic activity is conducted in cash, and the informal sector primarily pays employees in cash. Furthermore, cash hoarding has become a growing phenomenon among both businesses and households.
The immediate positive impact of digital currencies lies in bringing economic activity out of the shadows and into the realm of documentation and taxation. Unlike cash, digital currency transactions are always traceable, making it extremely difficult to hide financial activities. This increased transparency could play a vital role in stabilizing the country’s economic situation.
CBDC and digital identity
CBDC presents a unique opportunity to Pakistan with its state-of-the-art NADRA identity. By establishing a link between a user’s digital identity and the device used to transact, CDBC is essential to the security and trust of digital payment systems. By linking a person’s unique digital ID to his CBDC wallet, the central bank can authenticate the person’s identity and ensure the safety and authenticity of transactions.
Access to financial services
One of the most significant obstacles to financial inclusion is the lack of access to traditional banking services. Many individuals are excluded from these services due to remote locations and the complex onboarding processes required by banks. By enabling transactions on mobile phones, CBDCs can provide a route into the formal financial system without the need for a physical bank account. This will extend financial services to the unbanked and underbanked and promote financial inclusion.
Enhanced security
CBDC transactions are made more secure through the integration of digital ID and device authentication. This enhanced security minimizes the risk of identity theft and fraud and increases confidence in the system. As a result, individuals are more likely to adopt CBDC and engage in digital financial transactions.
new business model
CBDCs allow households to establish a financial history. This not only benefits consumers, but also creates a digital record of valuable financial information that businesses and new entrants can use to develop and introduce new products and services to the unbanked. There is a possibility.
CBDC promise to Pakistan
For Pakistan, CBDC has many benefits, including:
- Improved payment system:CBDCs aim to improve payment systems by offering faster, cheaper transactions and reducing the friction and costs associated with physical cash storage.
- Increased efficiency:CBDC aims to reduce the need for intermediaries in the payment process, reduce transaction costs and increase speed. It also optimizes the settlement process for cross-border transactions.
- Strengthening monetary policy: CBDCs give central banks better control over monetary policy, allowing them to more directly control the supply and velocity of money. This gives you visibility into payment flows and allows for more effective policy implementation.
seize the chance
Despite increased financial inclusion, there is still a long way to go, as the 30% achievement rate shows.[2] Inclusion rate reported in Pakistan in 2022. Digital currencies promise to make future payment transactions faster, more economical, and more streamlined. Pakistan can leverage the development of a CBDC to serve more unbanked customers, especially a young, tech-savvy population and a workforce with IT skills. NADRA’s unique ID number, required for various official documents, will play a key role in the success of a CBDC.
The State Bank of Pakistan’s move towards a comprehensive digital financial services (DFS) framework, including regulation and digital onboarding for e-money institutions, will pave the way for CBDC.
Digital financial inclusion: A powerful use case for CBDC
To fully exploit the potential of digital currencies, organizations need to improve their capacity, allocate talent and expertise, increase financial and digital literacy, and strengthen stakeholder communications to reach the masses. there is.
Governments can spend cash on social security programs, salaries, subsidies, pensions, etc. through CBDC. Moreover, creating a favorable ecosystem for digital payments in government-run institutions can further encourage the uptake of CBDC.
Recommendations for a successful CBDC implementation include:
- No bank account required: You can access CDBC without a bank account.
- ease of use: Streamlined process with minimal fees.
- offline payment: Supports offline transactions that do not require a smartphone.
- interoperability: Compatible with other digital channels.
- ecosystem development: Facilitate use and acceptance at various points.
- reward: Incentives for the use of CBDC.
- easy conversion: A smooth transition to cash.
- Awareness and Literacy Program: Education of the general public, especially in rural areas.
- Efficient payment and complaint management: To ensure a better user experience.
Digital currencies issued by central banks are reshaping the financial landscape around the world. The potential for financial inclusion, improved payment systems and strengthened monetary policies make them a promising solution. Still, challenges such as cybersecurity, infrastructure, user education, and privacy issues must be addressed for successful implementation. By seizing these opportunities and overcoming setbacks, CBDCs can become true game-changers in the financial world.
[1] World Bank Findex
[2] https://portal.karandaaz.com.pk/dataset/financial-digital-inclusion/1038
