Digital currency: Is it the future of money?

The government should proactively explore how the adoption of a digital currency can add value to the economy while maintaining coherence with Bangladesh's social and political climate, experts said yesterday.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said the widespread adoption of central bank digital currencies (CBDCs) represents a significant evolution in the monetary system.

CBDCs are a form of digital currency regulated by a country's central bank. They are similar to cryptocurrencies, but their value is fixed by the central bank.

"We have to show more excitement for a CBDC. It doesn't mean that we will do it now. We should identify its limitations and advantages so that we can do it better even if we are late in implementation compared to other countries," he said.

"We have taken a stand on cryptocurrencies by banning them… but for the CBDC we have to take decisions more proactively," he added.

"I am not sympathetic towards cryptocurrencies as they are not backed by central banks and vulnerability and volatility are associated with them," he said.

He said Bangladesh was in a state of inertia regarding the CBDC, adding that the country must strive to digitalise transactions no matter what, even if it does not adopt a digital currency.

He was speaking at a roundtable titled "Future of Money: Central Bank's Digital Currency", jointly organised by the PRI and The Daily Star at the Azimur Rahman Conference Hall at The Daily Star Centre yesterday.

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"Our digital infrastructure has to develop more, and our digital outreach and inclusiveness must broaden so that the next generation can carry out digital transactions," he added.

He said the introduction of the CBDCs was being witnessed across the globe.

"We must look at what other central banks are doing. We must explore why India is moving fast for a CBDC while China is reluctant and the USA is not proactive," he said.

"There are some tacit reasons and if we could understand and analyse these reasons, we can devise our strategy," he said.

Mohammad Abdur Razzaque, research director at the PRI, presented the keynote at the roundtable.

He said the potential benefits of the CBDCs include improved transaction efficiency, reduced costs of printing money, enhanced security against counterfeiting, and the promotion of a cashless economy to combat financial crimes.

Former finance minister Mustafa Kamal had made a remark about conducting a feasibility study on the adoption of a CBDC. However, there are no notable updates regarding this issue, said Razzaque.

He said people mistakenly believe that the CBDCs are the same as existing cryptocurrencies. However, unlike cryptocurrencies, the CBDCs are backed by the country's financial system and are considered legal tender, he said.

Contrary to cryptocurrencies, the acceptance of CBDCs for transactions is mandatory, akin to traditional fiat money, which is a type of currency that is not backed by a precious metal, such as gold or silver.

Implementing the CBDCs will require a transaction record system, accessible service interface, reliable ledger, and secure storage solutions.

In a global survey conducted in 2020, 86 percent of central banks were actively exploring the CBDCs, a significant increase from the 65 percent reported in 2017.

In another study, the Bank for International Settlements said 15 retail and 9 wholesale CBDCs could be in operation by 2030.

Jamaica, Zimbabwe, Nigeria, and the Bahamas have officially launched CBDCs while numerous others are either researching, developing, or piloting similar programmes.

However, there are concerns about Bangladesh's digital preparedness which need to be addressed for successful implementation, Razzaque said.

"Bangladesh has marginally improved in global digital rankings, specific areas like network readiness, cybersecurity, and online services. However, digital literacy is still low, with over half of households unaware of the use of the internet and a significant portion lacking basic digital skills."

There are significant challenges in terms of cybersecurity, evidenced by past incidents like the Bangladesh Bank reserve heist.

Compromised databases and instances of hacks raise privacy concerns and security regarding the CBDCs while widespread internet usage amplifies worries about personal and financial data security.

The possible features for the CBDC design can be categorised into three main groups: instrument, system, and institutional features. It is crucial to adhere to the desired features to achieve the expected outcomes, Razzaque suggested.

He warned that any challenges impeding citizens' accessibility to the CBDC could exacerbate the digital divide.

He recommended setting realistic goals, with the existing cash-dependent economy in mind, for enhanced benefits. "It's crucial to recognise the additional benefits of a CBDC beyond simply promoting a cashless economy," Razzaque said.

Policymakers should also consider other critical functions of a CBDC, such as improving financial efficiency and transparency, facilitating and implementing a more effective monetary policy, providing social protection allowance more efficiently, and fostering the development of a digital financial ecosystem.

Formulating and updating digital infrastructure and institutional regulatory frameworks and improving mass digital literacy, fintech knowledge, addressing the digital divide, and data security are also important.

Jamaluddin Ahmed, board member of bKash, said Bangladesh first needs to shift from the current analogous bureaucratic system to a digital one to implement the CBDC.

"We are already lagging behind as Bangladesh is not among the 108 countries who are in the pilot stage for CBDC implementation," he said.

"We need to make gradual progress. It cannot happen overnight."

Ashikur Rahman, a senior economist of the PRI, suggested doing a meta-analysis on the lessons learned from global pilot studies.

"We can take lessons from China and India and start a pilot programme with a new design in Bangladesh," he said.

"We are still doing homework," he added.

Although the country's mobile financial services are faring well, a significant portion of transactions are still done in cash, said Mohammad Aminul Haque, additional managing director of Nagad.

"Although it will be difficult to eliminate cash, the country should optimise digital transactions to their fullest potential," he added, pointing out the lack of a skilled workforce.

Arif Rahman, manager of MicroSave Consulting, said the focus must be on increasing technology adoption among citizens by providing more user-friendly technology.

Tanjim Ferdous, in-charge of NGOs and Foreign Missions at The Daily Star, moderated the event.