Central bank digital currencies (CBDCs) in Latin America and the Caribbean

Summary

Focus

While much research has examined the pros and cons of central bank digital currencies (CBDCs), there has been less focus on the relative merits of CBDCs in particular economies or global regions. We attempt to fill that gap for the Latin American and Caribbean (LAC) economies.

Contribution

We first examine LAC central banks' views towards CBDCs, drawing on their responses to a BIS survey, and the extent to which their engagement with CBDCs can be explained by their economies' structural characteristics. Next, we review potential costs and benefits of retail CBDCs, focusing on their relevance to the LAC economies. We also address the challenges to central banks in the region posed by foreign CBDCs or private digital currencies, which may be especially salient for LAC economies, given their significant currency substitution and capital flow volatility. Finally, we review the design choices made by LAC central banks that have issued a retail CBDC.

Findings

The interest of LAC central banks in CBDCs, like that of central banks in other emerging market and developing economies (EMDEs), centres around promoting greater financial inclusion, efficiency, and safety of the payments system.

Our statistical analysis identifies important drivers of engagement in CBDC development: the extent of innovation, the presence of fast payment systems, government effectiveness, financial account ownership, financial development more generally and the extent of the public's interest in CBDCs.

We highlight CBDCs' potential to spur competition and reduce costs in the payment system, which are especially high in many LAC economies. CBDCs could also diminish the threat to monetary sovereignty from private digital currencies, promote financial inclusion and reduce informality.

An important concern for LAC economies is that CBDCs could lead to capital outflows and currency volatility. This concern can be addressed through limits on the use of CBDCs, foreign exchange regulations and cooperation with authorities in other jurisdictions.

An unusually high number of LAC central banks – five – have developed pilot or more permanent CBDCs. Most use a "hybrid" model involving both central banks and private firms.

Abstract

The pros and cons of CBDCs have been examined in numerous writings. However, much less research has focused on the benefits, costs and implementation issues of CBDCs in specific economies or regions. This paper attempts to fill that gap for the Latin American and Caribbean (LAC) economies. It first examines the views of central banks in the region toward CBDCs, drawing on their responses to a survey conducted by the BIS in late 2020 and early 2021. Second, it examines whether the engagement of LAC central banks with CBDCs can be explained by the structural characteristics of their economies. Third, it reviews the long list of potential benefits, costs and risks of CBDCs, focusing on their relevance to the LAC economies. Finally, the paper reviews the design choices that central banks face and the actual choices made by a number of central banks in the region.

JEL classification: E42, E51, F31, G21, G28, O32, O38.

Keywords: central bank digital currency, CBDC, payment systems, central banking, digital currency.