Does your country need digital cash?

Nine out of 10 central banks are exploring electronic versions of physical cash, according to the Bank for International Settlements’ 2021 survey of monetary authorities released this month. Nearly everyone, it seems, is convinced that the future of money is digital. While that might be right, does every country need to be on the bandwagon just yet? Not really. Whether you’re Poland or Peru should make a big difference in deciding just how big a priority a central bank digital currency (CBDC) should be. More advanced economies face a specific challenge: waning demand for cash.
The share of banknotes in point-of-sale transactions has dwindled to 11% in North America, 19% in the Asia-Pacific and 27% in Europe. As currency bills eventually start vanishing from circulation and into vaults, the public’s trust in the convertibility of bank deposits into official money may become “more of a theoretical construct than a daily experience,” in the words of the European Central Bank’s Ulrich Bindseil and others.
That could be problematic for financial stability, especially if lightly regulated private-sector tokens like stablecoins — cryptocurrencies that promise 1:1 convertibility with dollars or other widely accepted assets — step into the breach and replace official cash. For emerging markets, that would mean a return to “dollarisation,” and an end to decades-long efforts at establishing their own sovereign currencies.
Luckily, this isn’t a universal problem yet. Cash continues to dominate the payment scene in Latin America, the Middle East and Africa, according to the FIS Worldpay Global Payments Report 2021. It’s unlikely to disappear soon even in some highly developed economies like Japan. In other words, not all central banks face the same urgency in preparing for a post-cash future by going digital.
So who exactly needs a CBDC first? The contrast between Poland and Peru may help answer that question.
Both are emerging markets according to MSCI Inc, though the central European nation’s per capita
income of $15,000 is two-and-a-half times that of the Latin American country. Both have a fairly short history of currency sovereignty.
As Poland set out to rebuild its formerly command-and-control economy in the 1990s, foreign cash dominated the zloty 3:1 in commerce. (Up until the 1980s, authorities printed
a special legal tender against
dollar deposits. These “bony” notes could be used for everything from American cigarettes and Japanese cameras to clothes from Western Europe but had no value outside Poland.) Peru entered the new millennium with 80% of bank deposits denominated in dollars.

—Bloomberg