In a recent research, Colombia’s central bank has studied and commented about the adoption of central bank digital currency (CBDC). The central bank opines that the CBDCs are going to have a minimal impact on the struggling economy.
Furthermore, the central bank highlighted that the agency has not yet ruled out a CBDC. However, for it to succeed, the project has ample desirable features to generate a “core group of users.” In their deliberations, the authors of the report also recommend a particular kind of CBDC that would include spending limits.
The report adds that after working on the aspects of the retail CBDC, tiered architecture would be convenient for the Colombian economy. Under this, the bank also added few more suggestions like the holding and spending limits, be resilient to a wide range of incidents, and be non-interest bearing. The report stated:
“After revising several aspects of the retail CBDC, it is established that the more convenient design for the Colombian economy should be based on a tiered architecture (either the hybrid or intermediated by commercial banks), contain holding and spending limits, be resilient to a wide range of incidents, and be non-interest bearing.”
Additionally, in such a scenario with the suggested CBDC design, the expected macroeconomic effects of introducing CBDC would be negligible especially on financial intermediation and financial stability. The report stated:
“Considering the scenario described by the abovementioned design aspects, the expected macroeconomic effects of introducing this form of digital money into the economy would be nil, especially its potential detrimental disruptive effects on both financial intermediation and financial stability.”
However, referring to the usage of CBDC on global scale, the paper acknowledges that not all governments have the same reason for adopting a CBDC and notes that in some countries like the Bahamas, the motivation is clear.
In that case, it facilitates the transfer of money across the disparate islands. On the other hand, in other countries, the reasoning is not so obvious. Additionally, Colombia is also unlikely to need an immediate alternative to cash, as close to 75% of retail transactions are settled with physical money.
This statistics stands in clear contrast to countries such as India, China, and the United Kingdom, where digital payments are incredibly common.
Notably, bank deposits remain the predominant form of digital money, typically in the national currency, with minimal interest. Issued by commercial banks, they are redeemable on demand at their full value and backed by government and regulatory guarantees.
Furthermore, the report also notes that, regardless of a CBDC, policymakers should continue to develop rules on backed digital assets like stablecoins. However, when launched, stablecoins have not always proved popular.
Taking the case of Nigeria, another African country, e-Naira had recorded a very low adoption rate until this year when a scarcity of banknotes supercharged adoption.
Additionally, it is worth noting that some of the suggestions mentioned in the report resonate with suggestions from other nations across the globe. In particular, the spending limit in the report, is similar to what was suggested by the UK Finance, an organization that represents UK-based banks and financial firms.
The group suggested the individual holdings of the proposed digital Pound should be limited and refuted government’s limit. It suggested the limit to be £3,000($3819.37)-£5,000($6365.62) in a bid to avoid panic and the risk of bank runs in the future.