WHICH TYPE OF DIGITAL CURRENCY FOR FINANCIAL INCLUSION?

• Author: Zuluaga, Diego

When the Libra Association first announced its plan to launch a private digital currency for domestic and cross-border payments--then consisting of a single token backed by a mix of stable fiat currencies--financial inclusion was a big part of its business case. With 1.7 billion people globally lacking a bank or mobile money account, Libra thought it was imperative for some of the world's largest companies, including the leading social media platform, to join forces and bring cheap payments to the world's "unbanked." And while this project has faced a rocky reception from central bankers and regulators--for reasons good and bad--even they often frame the case for their own, public digital currencies (CBDCs) in terms of bringing cheap and fast electronic payments to the greatest possible number of people, as cash use and cash acceptance decline.

Neither Libra's promoters nor central bankers are wrong. With smartphone penetration having long outpaced bank account ownership in many countries, digital wallets offer greater promise for bringing people into the mainstream financial system than analog approaches such as postal banking or a Canada-style public mandate. But to appeal to unbanked households, digital wallets must address the reasons why the unbanked are so. Ubiquity and minimal fees are important--as CBDC proponents suggest in making their case--but so are privacy, reputation, and simple interfaces that help customers understand their financial position and solve their questions and complaints without jargon or bureaucracy.

In what follows, I will define financial inclusion as more than just giving everyone a bank account. I will then examine public and private digital currencies according to their ability to foster inclusion in this deeper sense. Because many central banks--including the Federal Reserve Board--are seriously considering CBDCs in the medium term, I will outline some principles that should guide the development of public digital currencies, if the goal is not simply to give people a bank account, but to give them an account they want to use. These principles should generally also apply to private initiatives. I will conclude with some comments regarding whether "peaceful cohabitation" might be achieved between CBDCs and private digital currencies.

Defining Financial Inclusion

America's financial inclusion problem is usually expressed as the percentage of households--5.4 percent at last count, according to the Federal Deposit Insurance Corporation (FDIC 2020: 1)--who lack a bank account. This percentage is considerably higher than those of other rich countries, such as Britain, Canada, and Germany, where account ownership is near universal. The absolute number of unbanked U.S. households is staggering, at 7.1 million, and while the FDIC's biennial surveys chart an encouraging trend of decline since 2011, the pace of that decline is unsatisfying to many people, myself included.

But I am also unhappy with the conventional definition of financial inclusion. It assumes that, were someone to open an account on behalf of each unbanked household, the problem would be solved. Some experts whose commitment to help the unbanked I do not doubt advocate just that: a mandate for the Federal Reserve to create retail deposit accounts--"FedAccounts"--on demand (Ricks, Crawford, and Menand 2021). But I think the merits of this intervention as a financial inclusion policy are questionable, as there is no assurance that the unbanked want such accounts.

When the FDIC last asked the unbanked why they are so, just over a third cited minimum balance requirements and high fees as the main reason. If "FedAccounts" earned no such fees, one might expect these households to welcome them and move from cash to electronic money. But that leaves two-thirds of the unbanked who might still eschew FedAccounts. Why? Because their chief reasons...