Overseas experience points to digital cash not being widely adopted, so far

The Reserve Bank of New Zealand (RBNZ) has begun a multi-year consultation round on a retail central bank digital currency (CBDC) for the country, without committing to issue such digital cash until sometime around 2030, perhaps.

A NZ CBDC would be similar to cryptocurrency, but equal in value to the country's fiat money. One of the positives the RBNZ sees with a CBDC is the provision of a new open, interoperable and safe payments platform, with built-in functionality to encourage a rich ecosystem.

CBDC users would not need to operate bank accounts either, only digital wallets, smartphones or payment cards for the digital cash.

Despite what appears to be compelling advantages, the experience from Caribbean nations suggests that the success of a digital cash system is far from assured.

Earlier this month, the Federal Bank of Kansas City (FBKC) published a briefing document with observations on existing retail CBDCs in use in Caribbean economies, noting that all have struggled to achieve expected adoption from both consumers and merchants.

The CBDCs are the Bahamian Sand Dollar introduced in 2020, DCash from the eight-nation Eastern Caribbean Currency Union (ECCU) and Jamaica's JAM-DEX that arrived in 2022.

In all three cases, the main goal was to shift physical cash economies into digital ones, but the CBDCs have not demonstrated the value added for consumers to embrace it.

While the Sand Dollar and cash systems are built on private, permissioned blockchain ledgers, JAM-DEX uses a centralised equivalent, controlled by the Bank of Jamaica. 

In all cases, payments are made with smartphones and digital wallets.

The underlying technology for CBDCs appears to be relatively unimportant, however, with all three Caribbean digital cash systems using different foundations.

FBKC notes that the new digital payments methods have seemed to have fallen flat with consumers, merchants and in some cases, the financial institutions meant to operate the payments platforms.

About one year after the Sand Dollar went nationwide (October 20, 2020), Sand Dollar circulation reached around B$300,000; however, adoption was relatively flat for the following year. In May 2023, the Sand Dollar had about 104,664 consumer wallets and around 1,500 merchant wallets (CBOB 2023). After a series of Sand Dollar educational campaigns, promotions, and giveaways—as well as the integration of the rCBDC with government payments and the ACH system—circulation rose by about B$1 million, reaching B$1,099,910 by September 2023 (Branch, Ward, and Wright 2023). Still, this value amounts to only 0.19 percent of the total currency in circulation at the time.

For DCash and JAM-DEX, the adoption is even lower at 0.16 and 0.11% respectively. DCash was halted briefly in 2022, a year after it was launched, following a technical issue with the HyperLedger it is built on. The ECCU said it would replace the original DCash with a version 2.0 over the next couple of years, with the initial platform closing in January this year. Users are able to redeem the Dash funds deposited in the platform.

Another cause for the low adoption identified by the Caribbean central banks was merchants not participating in CBDC networks, which were not integrated in the traditional banking system for their accounts anyway. 

Banks and credit unions were slow to sign on as well to digital cash, and customers were not convinced there was any demonstrable added value over traditional cash.

Elsewhere, Nigeria, the first country in Africa to adopt a CBDC has seen similarly low adoption, a working paper by the International Monetary Fund (IMF) suggests.

Part of the reason for the low adoption of the eNaira is that with the current design, the Nigerian Central Bank can see all user transactions. Due to financial crimes prevention measures, it is also difficult for poorer people to gather the stringent documentation required to identify themselves for larger transactions.

Finally, Nigeria suffers from unreliable electricity supply and spotty Internet access, neither of which are conducive to CBDC adoption.

Nigeria's Central Bank is now said to be looking for a new technology provider for the eNaira CBDC, to build a more robust system that appeals to users. 

In its consultation paper the RBNZ notes no advanced economy central bank has yet issued a digital form of money to the public, although many are researching or working on them. This includes the Reserve Bank of Australia, the Bank of England, European Central Bank and Sweden’s Sverige’s Riksbank.

Danmarks Nationalbank in Denmark has also looked into creating a CBDC, but expressed doubts that it would provide any actual benefits.

"With the well-functioning financial infrastructure we have in Denmark, it is not clear how a retail CBDC in Danish kroner can contribute to better and more secure access to payments and financial services or to creating more safe and efficient solutions for citizens and society in general." the Danish reserve bank wrote.

China is exploring issuing digital money with a pilot called the e-CNY. As of June 2023, it had issued e-CNY into more than 120 million individual wallets and conducted 950 million transactions in e-CNY worth approximately 1800 billion yuan ( about US$251 billion), the RBNZ says.

Reuters also reports the e-CNY is seeing some adoption momentum. Some Android devices in China provide payments functionality even when the devices don't have Internet access, or have run out of battery. Even then, the e-CNY is a small fraction of China's cash in circulation at just 0.16%.