As central banks worldwide explore the potential of Central Bank Digital Currencies (CBDCs), the implementation process in developing countries faces unique challenges. While CBDCs promise benefits such as broader financial inclusion, increased efficiency, and transparency, significant resistance must be addressed to ensure successful adoption. According to data from the Atlantic Council CBDC Tracker as of May 2024, a total of 134 countries or currency unions have tracked CBDC developments. Among them, 3 countries have launched CBDCs, 36 are in the pilot phase, 30 are in development, 44 are in the research stage, 17 countries have halted or suspended activities, and 2 countries have cancelled their CBDC implementation plans. This article will discuss six main categories of resistance that developing countries may face during the transition to digital currencies.
1. Trust and Public Perception
Trust is the foundation of any successful monetary system, and it is crucial for the success of CBDCs. However, in many developing countries, distrust in the government and central banks presents a major challenge. This distrust often stems from a long history of corruption, economic mismanagement, and a lack of transparency, leading to skepticism among the public. The introduction of CBDCs, which could potentially give the government greater access to monitor individual financial activities, may exacerbate concerns about excessive surveillance and loss of privacy.
This issue is evident in the case of the eNaira launch in Nigeria in 2021, where CBDC adoption faced significant hurdles due to a lack of public trust. Many Nigerians feared that the eNaira would be used for stricter surveillance or even misuse of public funds. To address these challenges, governments need to engage in transparent and consistent communication with the public, emphasizing the security measures and privacy protections in place to build trust and change the negative perception of CBDCs.
2. Infrastructure and Technological Limitations
One of the biggest obstacles to CBDC adoption in developing countries is the inadequacy of digital infrastructure. Reliable internet access, widespread availability of digital devices, and sufficient digital literacy are crucial prerequisites for supporting an effective CBDC system. Unfortunately, many developing countries are still grappling with these basic infrastructure issues. Without addressing these gaps, the launch of CBDCs could deepen existing inequalities, leaving large segments of the population without access to the new digital currency.
For example, in India, while internet penetration has significantly increased in recent years, there are still major challenges to overcome. According to recent reports from DataReportal (Digital 2024: India) and Statista, internet penetration in India reached 52.4% of the total population at the beginning of 2024, meaning that approximately 751.5 million people were Internet users in India as of January 2024. Although this number increased by 19 million (+2.6%) between January 2023 and January 2024, about 47.6% of the population (approximately 683.7 million people) still did not have internet access at the beginning of 2024. These figures indicate that despite progress, a large portion of the population is still not reached by adequate digital infrastructure, which could be a significant barrier to CBDC adoption. Therefore, investing in infrastructure development and digital literacy programs is crucial to ensure that CBDCs can reach all segments of society, not just those with existing digital access.
3. Legal and Regulatory Uncertainty
The legal and regulatory landscape in many developing countries is often underdeveloped or unclear, creating uncertainty around the implementation of CBDCs. Clear legal frameworks are needed to define the roles and responsibilities of all stakeholders, ensure consumer protection, and mitigate risks associated with digital currencies. Governments must also address concerns about the potential for CBDCs to exacerbate inflation or currency devaluation, which could hinder public acceptance. Therefore, it is essential for developing countries to establish strong and transparent regulatory guidelines and collaborate with international regulatory bodies to build a solid foundation for CBDC implementation.
For example, Bank Indonesia (BI) is exploring the issuance of digital rupiah, but a comprehensive legal and regulatory framework is still in development. There is an urgent need to clarify aspects such as consumer protection, anti-money laundering, and counter-terrorism financing within the context of CBDCs. In Africa, many countries face similar challenges in developing adequate legal and regulatory frameworks for CBDCs, often due to a lack of capacity and expertise in financial technology and digital currency regulation. This regulatory uncertainty can hinder investment and innovation in the CBDC space, slowing progress towards successful adoption.
4. Impact on the Financial Sector
The introduction of CBDCs poses challenges for traditional financial institutions, particularly commercial banks, which fear disintermediation. However, these banks can expand their roles in the digital era by offering new, relevant services. One potential role is as the provider of consumer personal data storage services. Given the trust already established between banks and customers, banks can leverage their security infrastructure to offer secure personal data storage solutions and help consumers manage data access permissions for various digital services.
In addition, commercial banks can expand their business by offering secure cryptocurrency storage services. Amid the growing popularity of crypto, banks can use their infrastructure and security measures to offer crypto wallets equipped with loss insurance and high-level security. This not only strengthens customer trust but also opens up new revenue streams. Banks can also develop digital wealth management services, including consulting and portfolio management for digital assets such as crypto and non-fungible tokens (NFTs), to remain relevant in the evolving market.
Commercial banks could also develop payment platforms integrated with CBDCs, enabling seamless transactions in both fiat and digital currencies. This includes faster cross-border payments and payment solutions for e-commerce supported by CBDCs. By expanding their roles, including offering digital financial solutions for SMEs, commercial banks can maintain their relevance and remain key players in the continually evolving digital financial ecosystem.
5. Socio-Economic Challenges
Socio-economic conditions in developing countries present unique challenges for CBDC adoption. Economic instability, high levels of poverty, and the dominance of the informal economy can hinder the smooth transition to digital currencies. Additionally, cultural attachment to cash, especially in less developed rural areas, can lead to resistance against digital alternatives. Therefore, governments must tailor their CBDC strategies to the specific socio-economic contexts of their countries, promoting financial inclusion and ensuring that vulnerable populations are not left behind in the digital transition.
Some countries have begun addressing these challenges through social innovations focused on financial inclusion. For example, China has launched a pilot project for the digital yuan in several cities to increase financial inclusion, particularly in rural areas where access to traditional banking services is limited. The digital yuan is also expected to more effectively target social assistance, ensuring that funds reach those in need. On the other hand, Sweden, with the development of the e-krona, emphasizes accessibility as a key social innovation. The e-krona is designed to complement cash and ensure universal access to public payment forms, even as cash usage declines. Sweden is also planning offline options and simple user interfaces to ensure that everyone, including those with limited technology proficiency, can use it.
Experiences from China and Sweden demonstrate the importance of aligning CBDC implementation with local populations’ socio-economic conditions and needs, ensuring that CBDCs can be effective tools for financial inclusion rather than exacerbating existing inequalities.
6. Privacy and Data Security Concerns
The digital nature of CBDCs raises significant concerns about privacy and data security. In developing countries, where cybersecurity infrastructure may be less robust, the threat of cyberattacks is a serious concern. Additionally, the potential for government overreach in monitoring financial transactions can trigger public resistance. To address these concerns, central banks must prioritize the development of secure and resilient CBDC systems that protect user data and privacy. Transparency about how data will be managed and protected, along with strong cybersecurity measures, will be crucial to gaining public trust.
Conclusion: A Strategic Path Forward
To achieve successful CBDC implementation in developing countries, a strategic and holistic approach is needed that includes building public trust, investing in infrastructure, establishing clear legal frameworks, mitigating the impact on the financial sector, addressing socio-economic barriers, and ensuring strong privacy protection. By effectively addressing these challenges, developing countries can harness the benefits of CBDCs, promote financial inclusion, and contribute to economic development while positioning themselves as leaders in the global digital currency landscape.
