Leading the way: what emerging markets teach us about CBDC innovation

Dr. Wolfram Seidemann of Giesecke+Devrient Currency Technology describes the role that central bank digital currencies play in bridging the gap between cash and the digital world in emerging markets

Despite challenging global market conditions over 2022, the digital world has continued to evolve. Forecast to become a $13 trillion business by 2030, the metaverse economy offers a growing range of revenue streams, while the e-commerce and IoT payments markets are also projected to thrive.

Against this backdrop, central bank digital currencies (CBDCs) play an important role in bridging the gap between cash and the digital world. Emerging markets like Ghana and Eswatini are currently ahead in unlocking the value of CBDCs, empowering banks and non-banks alike to build inclusive and pioneering digital schemes, products, and services.

Developed markets can now take the opportunity to benefit from the pioneers’ learnings. This should give them the confidence to take their own bold steps towards a CBDC future, following the lead of emerging markets by developing a whole new infrastructure for financial growth.

Driving digital innovation

CDBC adoption is being powered by countries with less developed financial infrastructures or less competitive consumer choice. However, another shared characteristic sets these emerging markets apart – a keen awareness of the need to innovate. They are leapfrogging structures established in developed countries and pushing digitalization.

As a digital form of cash, CBDCs bring a variety of benefits to central banks, including greater convenience, security, and cost effectiveness. In addition, CBDCs spur digital innovation by offering network effects. This is vital for creating effective competition and efficiency through interoperability of payment platforms.

Therefore, developed countries risk resting too much on the status quo. Emerging markets, by contrast, are seizing opportunities to innovate and keep pace with the changes in digital finance. Giesecke+Devrient carried out a successful CBDC pilot with the Bank of Ghana, where swift integration of financial intermediaries is enabling the frictionless flow of CBDC between mobile money and bank accounts. This project highlights the benefits of interoperability in supporting seamless user experiences and new business opportunities.

Ghana is now set to use the insights and feedback from the trial to support wider rollout plans. Could this be the encouraging nudge other markets need to undertake their own CBDC journey?

Sharing the power

Strong public-private collaboration is key to the success of CBDCs. After all, central banks do not have to and do not want to compete with private financial entities. A CBDC ecosystem should be created by a trusted distribution of roles between the public and private sector. The public sector engages only if there is a gap to fill. 

As such, CBDCs enable user participation in the digital economy – independently from central banks. While the central bank provides the open infrastructure, the private sector innovates on the platform and interacts with consumers and merchants. This is why early stakeholder engagement matters: financial intermediaries are crucial to on-boarding, distribution, and wide-scale CBDC adoption.

For example, countries like Ghana and Eswatini are aiming to build diverse ecosystems, where the core infrastructure is provided by the central bank and customer-facing services and products are developed by private players. Such public-private partnerships create trust in the currency and convenience of innovative financial services.

Financial inclusion

Everyone should have access to convenient, secure digital payments and other financial services. CBDC has the potential to make this ideal a reality. It is a digital version of physical cash – a ubiquitous and fully inclusive financial instrument that people can use independent of the issuer.

CBDC is also a public infrastructure that allows the market to build innovative products and services, including cheaper cross-border payments, finance automation, and smart contracts. For the 1.4 billion unbanked adults globally, as well as all our ‘unbanked’ children who form the next generation, CBDCs promote participation in the digital economy.

In Ghana, many potential users of CBDCs live in off-grid rural environments. Through a simple digital device, they can connect to smart cards to make secure, instant, low-cost payments without the need for network connectivity or electrical power. This should inspire developed nations to leverage offline functionality and introduce a digital form of public currency that is simple, resilient, and universally accepted.

Growth opportunities

With the potential to shape tomorrow’s digital economy, a collaborative CBDC ecosystem will deliver fast adoption and strong growth. It is already proving to add value to societies, serving as a bedrock for future innovation and inclusion across the globe.

A world with CBDC is drawing near, and emerging market economies are trailblazing the path towards a reimagined digital economy. To become participants, developed countries should stop asking what problems CBDC could solve, and instead see the opportunities CBDCs will bring. 

Dr. Wolfram Seidemann is CEO of Giesecke+Devrient Currency Technology

Main image courtesy of iStockPhoto.com