Central Bank Digital Currencies : A Potential Response to the Financial Inclusion Challenges of the Pacific

Many Pacific island countries are among the world’s most remote and geographically dispersed. As such, financial inclusion remains a major challenge, with many in the region still lacking access to financial services. This policy brief considers whether central bank digital currencies (CBDCs) can promote the accessibility of financial services across the Pacific islands and the design choices involved in their development.The brief suggests that CBDCs may offer a highly efficacious solution to (i) the problem of high remittance costs that currently serve as a tax on the earnings of Pacific islanders abroad when they send money home, and (ii) the financial inclusion challenges of the region. However, implementation of these digital currencies is a significant challenge.The CBDC is a complex piece of software and a complex digital framework capable of generating both economy-wide benefits and shocks. The establishment and operation of a CBDC by any Pacific country will require considerable expertise and a deep understanding of the designs and issues this fundamentally new form of currency gives rise to in the local context. The development of a safe, efficient, and accessible CBDC is likely to require Pacific island country regulators to redirect scarce resources away from pressing challenges, such as enforcing anti-money laundering and counterterrorism financing regulations, while maintaining correspondent relationships with overseas commercial banks.For this reason, this brief concludes that now is not the time for countries in the region to issue a CBDC, but it is the time to begin to develop the expertise and understanding. Understanding such matters requires focused study and substantial time for reflection and working through all potential consequences. If well-designed and appropriately implemented, CBDCs likely offer the best solution to the financial inclusion and remittance problems that bedevil the Pacific region. Now is the time to begin laying the groundwork for this potentially game-changing innovation by building knowledge within the region’s central banks