Central bank digital currencies in emerging markets

By: Janice Endresen
gold round Bitcoins sitting on dollar bills / paper currency

By Chris Goranov ’24 (Arts & Sciences)

What is a central bank digital currency?

Central bank digital currencies (CBDCs) are electronic records or digital tokens that represent the fiat currencies of a nation. Just like paper bills, each CBDC is a store of value, mode of payment, and a unit of account. Unlike cryptocurrencies, CBDCs are centralized and regulated by the nation’s monetary authority and backed by monetary reserves such as gold or foreign currency. They are purposed to supplement cash, not to replace it.

The implementation of CBDCs has been inspired by the increasing use of cryptocurrencies. As there has been a lack of regulation, centralization, and transparency with these upcoming digital assets, central banks perceive them as potential threats to fiat currencies. Now, more than 80 percent of central banks are researching CBDCs and central banks representing a fifth of the world’s population are projected to issue a CBDC within the next three years.

I wanted to explore the potential impact of CBDCs during my internship with Cornell’s Emerging Markets Institute. The technology could generate many valuable benefits, yet there are still uncertainties to be considered.

Benefits of CBDCs in emerging markets

Emerging economies have been leaders in CBDC development, and this up-and-coming innovation has the potential to produce several powerful changes in these markets—one of which is increasing financial inclusion.

As of 2017, 94 percent of adults in higher-income countries have bank accounts, while only 63 percent of adults in developing countries have bank accounts. This gap is attributed not only to poverty, but also to the cost, travel distance, and requirements needed to open a bank account, which are burdensome to many in developing nations.

However, from 2014 to 2017 in Sub-Saharan Africa, individuals with a mobile money account doubled to 21 percent, while bank account ownership increased by around 4 percent. Digital payment methods have become an alternative to bank accounts due to increased technological penetration even in rural areas. As CBDCs provide digital payment methods and offer all citizens an account, they could be a means of efficiently boosting financial inclusion in developing nations.

Secondly, CBDCs could reduce transaction costs of payments into emerging countries where many citizens rely on remittance inflows. India, Mexico, Philippines, Egypt, and Pakistan—all developing countries—accrue the highest remittance inflows in the world, receiving over 30 percent of global cross-border payments. Additionally, the top 20 emerging markets defined in the Emerging Market’s Institute’s upcoming 2021 report account for over 50 percent of global remittance payments with over $300B in inflows. These payments are typically transferred incrementally instead of through larger lump-sum transfers. Consequently, approximately 10 percent of a $200 transfer is lost to transaction fees of intermediaries. Given that direct digital payments remove intermediaries and charge lower fees, the adoption of CBDCs could result in the retention of around $30B in emerging nations. Payment speeds would also increase due to digitalization and the removal of intermediaries. Overall, the implementation of a CBDC could reduce costs and increase the speed of cross-border payments.

CBDCs also offer a way to centralize digital payment methods, building on the work that many emerging market nations have already done to lead the way in cryptocurrency adoption. Countries that have the highest percentages of population owning cryptocurrencies, in descending order, are Ukraine, Russia, Venezuela, Kenya, the United States, India, South Africa, Nigeria, Colombia, and Vietnam; nine of these top ten countries are emerging markets. El Salvador recently began accepting Bitcoin as legal tender and has been struggling to establish a stable system, yet the World Bank rejected their request for assistance due to transparency concerns. Although cryptocurrencies are attractive payment methods in emerging economies because of various advantages they provide, they can be difficult to oversee. Now, CBDCs will provide similar benefits to cryptocurrencies and may even utilize the same technology. The implementation of a CBDC, backed and regulated by central banks, could establish a more centralized, monitored payment system that tracks each interaction.

Risks of CBDC adoption

CBDCs may generate powerful benefits within emerging economies, but there are still uncertainties about their structure and the possible risks of adoption. While they have the potential to make financial transactions more efficient, CBDCs may also cause financial disruption and instability due to uncertainty about the structure of CBDC implementation.

China’s CBDC—its digital yuan—is designed to facilitate online transactions. Intended to supplement the local currency, it is not available to non-Chinese residents to obtain or trade, and is backed by the Central Bank of China.

However, other nations could design their CBDCs to have different purposes and impacts on the banking system. Will they offer an interest rate? Will they be exclusive to the domestic population? If a high interest rate is offered, banks may have to increase interest rates or offer new services to keep deposits from being withdrawn. If there is no interest rate, CBDCs may not be seen as attractive investments or worthy stores of value. What would happen if interest rates become negative? Different economies designing their CBDCs to produce different outcomes could lead to financial disruption on the global level.

A second issue is that central banks have to carry the high-stakes burden of sustaining the infrastructure for CBDCs. Banks are responsible for managing customer interaction, building wallets, maintaining technology, and providing impenetrable security. If there is any human error, successful cyberattack, or glitch in the system, central banks will lose credibility, private information could be exposed, and the domestic currency could depreciate. Also, as cyberattacks have been increasing and financial institutions are 300 times more likely to be targeted, central banks will face immense pressure to create and maintain secure CBDC technology.

Finally, there is a risk of digital dollarization—the adoption of the US dollar to replace the depreciating or volatile domestic currency and stabilize buying power—in countries with high inflation and political instability. For example, Zimbabwe faced such severe hyperinflation after the 2007 financial crisis that bread reached a price of 550 million Zimbabwean dollars. In response, the US dollar was adopted, providing stability and monetary credibility. CBDCs may make the digital dollar easier to obtain and transfer in emerging nations than paper bills, which would encourage digital dollarization. As a result, monetary and fiscal policy would prove less effective in the developing nations and there would be increased vulnerability to foreign influence.


The design of CBDCs is crucial in addressing their potential problems. When implemented correctly, CBDCs could widen financial inclusion, decrease transaction costs, centralize payments, and increase transaction speeds. But when mismanaged, they could also cause financial sector disruptions, technological dependence, digital dollarization, and security threats. In fact, the IMF and World Bank have sponsored a challenge for the public to tackle these problems. Central Bank Digital Currencies may revolutionize financial transactions soon, but central banks will have to thoroughly address the inherent risks of adopting CBDCs.

About Chris Goranov ’24 (Arts & Sciences)

headshot of Chris Goranov

Chris Goranov is a rising sophomore in Cornell University’s College of Arts and Sciences, where he is pursuing degrees in both economics and statistics. He has worked on several projects as a research intern at Cornell’s Emerging Markets Institute, including ranking emerging economies using ESG metrics and CBDC research. Chris is interested in a learning more about international finance, foreign exchanges, and entrepreneurship.