In the ever-shifting sands of global finance, a strange development has emerged from the South American nation of Chile. Banco Central de Chile, the country's central bank, Recently published a report on central bank digital currencies – an emerging technology that has the potential to reshape the way money flows. Unlike the wave of enthusiasm sweeping other countries, Chile's conclusion is largely practical: it simply does not need such a solution, at least not yet.
This decision stands in stark contrast to the global stampede toward central bank digital currencies.
China's digital yuan is already a reality, while countries like Russia and Iran are exploring it as a way to circumvent international sanctions. Even established economies like the United States are actively exploring the potential of the digital dollar. So, what makes Chile different?
The answer lies in a combination of factors, most notably Chile's strong financial inclusion. With a staggering 85-87% of the population having bank accounts and widespread adoption of digital payment methods, the perceived need for central bank digital currencies to bridge financial gaps simply does not exist. Chileans already have a good system for moving money, with credit and debit cards readily available and e-wallets very popular. In this context, a central bank digital currency (CBDC) may be viewed as a solution in search of a problem.
However, the Chilean report does not represent a complete rejection of CBDCs.
It recognizes the potential benefits, particularly in promoting innovation and competition within the financial sector. The report highlights the appeal of features such as programmable payments and smart contracts, which can simplify transactions and open up new possibilities. There is also the potential to increase efficiency in areas such as remittances, a crucial factor for a country with a large expatriate population.
But like any new technology, central bank digital currencies come with their own set of challenges. The report raises concerns about consumer acceptance, especially in a country where existing financial instruments are deeply entrenched. Chileans may be reluctant to give up the familiar comfort of well-established banking systems in the uncharted territory of a central bank-issued digital currency. There are also legitimate concerns about the potential impact on bank deposits, a concern that has been echoed by experts around the world. A mass exodus from traditional accounts could destabilize the financial system, raising questions about liquidity and the availability of credit.
The Chilean report serves as a valuable counterpoint to the current narrative surrounding central bank digital currencies.
It reminds us that this technology is not a one-size-fits-all solution. While countries like China, whose population is largely unbanked, see CBDCs as a tool for financial inclusion, other countries with well-established systems may need a more compelling reason to adopt them.
This brings us to the bigger question: What problem are we trying to solve with CBDCs? Is it about financial inclusion as some say? Or is it a matter of greater control for central banks in the digital age? The answer will likely vary depending on the country and its unique economic landscape.
Chile's decision not to rush a CBDC agreement is a testament to its focus on pragmatism rather than hype. It allows them to observe the global experience, and learn from the successes and failures of other countries. They can then evaluate whether a CBDC offers real value to their specific financial ecosystem.
This thoughtful approach does not mean that Chile is immune to the winds of digital change. The report concludes by noting that the central bank will continue to prepare for the future, and will remain open to the possibility of creating a central bank digital currency if circumstances change.
The story of Chile and central bank digital currencies is a reminder that innovation does not always require immediate adoption.
Sometimes, the most innovative approach is to wait, watch, and adapt when the time is right. In a world obsessed with the next big thing, Chile's measured approach offers a new perspective, one that prioritizes long-term stability over fleeting technological trends. As the global experiment with central bank digital currencies continues, the rest of the world would be wise to take into account Chile's careful study.
This article was written by Pedro Ferreira at www.financemagnates.com.
