Central bank digital currencies are often used to pay salaries during the initial stages of implementation and as early use cases. While the sand dollar in the Bahamas was the first use of a CBDC for payroll in 2021, the deputy prime minister of Ukraine announced in January 2023 that ministry of digital transformation staff would receive salaries in CBDC once the currency was implemented.
Alongside CBDC distribution through welfare, lotteries or giveaways for early adopters, paying wages in CBDCs could be the first step of rolling out a CBDC adoption initiative. People who receive a CBDC in their digital wallets would be more likely to continue using it for payments.
There should, however, be practical benefits encouraging people to use CBDC in day-to-day life that also improve people’s financial health. When we refer to ‘financial health’, this encompasses factors that can influence an individual’s or organisation’s overall financial wellbeing, including savings habits, debt management and the utilisation of various financial services – ranging from investments to insurance.
Enabling the unbanked to access financial products and services
CBDCs can protect privacy by design through a true separation of concerns for operational, transactional and governance processes. Thereby, CBDC can be designed to exclude personal data of end users, such as identity information for transactional and operational purposes. At the same time, public authorities can obtain anonymised real-time information (such as non-personalised volume or numbers) about payment transactions in the economy – facilitating high-quality and timely analysis.
Data can support the evaluation and offering of financial services. For instance, around 60% of the global population is involved in the informal sector. Although mostly prevalent in emerging and developing economies, it is also an important part of advanced economies. One of the main barriers preventing many individuals from accessing loans and other financial products is the lack of a credit history or other financial information. A CBDC wallet would enable access to formal financial products through a digital fingerprint, provided by the user willing to share data with financial service providers. This is analogous to the data we already share today when using bank accounts or payment apps.
Hence, CBDCs could be the entry point into the formal financial system and economy for individuals and for micro-, small- and medium-sized enterprises. With the user’s consent, a digital fingerprint containing data such as income history, debt load and repayment records could be shared with financial institutions. This would enable access to services that go beyond simple payments, enabling individuals to access new financial products, from lending and savings to investments and insurance.
Non-bank payment system providers would benefit from CBDC distribution among the unbanked population, as possessing a traditional bank account would no longer be needed to access CBDC. Furthermore, by making CBDC data shareable with banks, those without bank accounts can still build credit and gain access lower interest-rate loans.
Findings by the International Monetary Fund reiterate data from CBDC use can also increase overall lending in an economy if certain conditions are met. Using CBDCs for payments provides an alternative and secure means of saving, even when overall lending declines. This benefit directly impacts households. CBDCs also generate greater surplus in lending by reducing asymmetry pertaining to credit risk.
Gig economy benefits from CBDC
In contrast to civil servants receiving salaries in CBDC within full-time fixed contracts, there is a large number of employees worldwide with freelance, short-term contract and part-time arrangements. These so-called ‘gig workers’ get short-term employment assignments on popular platforms such as Freelancer, Uber or Fiverr. The market size of the global gig economy was valued at $413.9bn in 2022 and is expected to expand at a compound annual growth rate of 14.2% during the forecast period, reaching $918.9bn by 2028.
Given the short-term nature of the contracts, the wages of gig workers are typically lower and paid more frequently compared to the wages of traditional employees who receive monthly or bi-weekly salaries. CBDCs set specific requirements for the payment structure of wages: payments should be in real time and cost-efficient for smaller amounts.
Various payment instruments and methods partially fulfil these needs, such as instant payment systems, card schemes, electronic money and cryptocurrencies (particularly stablecoins). Both traditional payment mechanisms and novel cryptocurrencies suffer from drawbacks that make them unsuitable for making real-time payments at scale. These include the need for a bank account or payment card, additional fees and charges, support of a limited number of global currencies (applies to traditional instruments), complex access to crypto wallets and lack of liquidity.
Because a CBDC is issued by a central bank and pegged to a local currency, it is secure and inherently more stable than privately issued currencies. CBDCs can reduce costs because value is moved efficiently and payments are made instantly. Gig economy platforms can benefit from the features of CBDC, such as programmable payments, and gig payments can be one of the domains where cross-border CBDCs can be deployed.
There is no single existing technological solution that has all the core traits of a CBDC. However, CBDCs have the potential to improve access to financial services and to improve the overall financial health of people.
Roman Hartinger is Senior Business Analyst CBDC at G+D.