Chile Should Abandon CBDC Ambitions, by Paz Gómez

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Superior Private Options Will Emerge amid Market-Friendly Regulations

A report released by the Chilean Central Bank on March 21, 2024, has announced proof-of-concept trials for a digital peso, following two years of extensive exploration. When the initial exploration began in 2022, the first public report claimed the bank would assess the feasibility of a retail central-bank digital currency (CBDC)—tailored for personal rather than just institutional use.

However, in a country where financial inclusion and digital payment usage exceeds 85 percent of the adult population, there appears to be little need for a CBDC. Chile should reconsider its digital-currency plan and, instead, focus on harboring financial entrepreneurship and innovation.

In the report, the Chilean Central Bank does not explain the need for a digital peso. On the contrary, the bank concludes that Chile does not need a CBDC—at least not for now—and mentions that the trials are in anticipation of future scenarios. The sole stated goal of the proof-of-concept trials is to train bank technicians in emerging technologies and identify internal knowledge gaps. That could be done without a digital peso, which suggests the underlying motive is fending off private currency competition.

Officials Ignore Local Landscape

While the Central Bank’s report assesses the state of CBDC projects across the world, it does not directly address Chile’s domestic banking and financial landscape. Further, the opaque report neither discusses the necessary budget for the proof-of-concept trials nor shares a tentative implementation schedule.

The Impunity Observer contacted the Central Bank for information on what it has spent on the CBDC exploration and the estimated budget for the proof-of-concept trials. However, the bank was tight-lipped and answered that the information would only be provided in an in-person meeting, under the terms of the Lobby Act. (I am in Ecuador.) Given that these trials will be conducted with taxpayer resources, transparency and accountability should be imperative.

The latest report reveals that officials and private financial service providers—who participated in working sessions during the diagnostic stage—identified several legal, technical, and operational challenges for CBDCs. These include the risk of mission creep in Chile’s monetary policy, the potential crowding out of private intermediaries by the central bank, and low citizen uptake.

Regarding the potential benefits, the World Economic Forum has touted retail CBDCs as a vehicle to improve financial inclusion and ensure efficient and safe digital payments. However, these benefits would be minimal in Chile.

According to the World Bank’s 2021 Financial Inclusion Index, 87 percent of the population already have a bank account and access to broad services. Furthermore, a recent survey conducted by payments processor Minsait Payments revealed that 82 percent of the banked population has been familiar with digital payments for more than four years. The vast majority of Chileans are already using digital financial services without apparent difficulties, so what is broken and in need of fixing?


Learn from Neighboring Countries


Although Chile leads Latin America for financial inclusion and digital payments, Minsait Payments notes that incumbent banks hold 90 percent of the market. Of respondents, 70 percent favor the emergence of new, competitive financial services to reduce fees and interest rates.

For instance, neobanks—100 percent digital banks—have significantly boosted financial services and inclusion in Brazil, Mexico, Colombia, and Argentina. One example is Nubank, founded in Brazil in 2013.

Nubank accelerated financial inclusion in Brazil and obliged incumbent banks to offer more effective and dynamic services. In 2014, the financial inclusion rate was 68 percent. By 2021, inclusion had grown to 84 percent. As of May 2024, Nubank had reached 92 million users in Brazil, 7 million in Mexico, and almost 1 million in Colombia.

To promote financial inclusion for the unattended 10 percent of adult citizens, Chile could follow the path of neighboring countries. That means Chile must increase internet connectivity, particularly in rural areas, and encourage banking innovation through supportive regulation and incentives. While 90 percent of Chileans have internet access, connectivity in rural areas is only 50 percent. Furthermore, despite the presence of over 2,300 fintechs in Latin America by late 2021, only 300 were based in Chile. Most of them focused on digital payments and were based in Mexico and Brazil.

Crypto Adoption More Telling than CBDC Projects


Of the 135 countries investigating CBDCs worldwide, 23 percent have embarked on controlled proof-of-concept trials, 26 percent are in a more open pilot phase, and 2 percent have actually issued a CBDC. For a variety of reasons, 14 percent have suspended their projects altogether. In Ecuador and Venezuela, the suspensions stemmed from constituents ignoring or rejecting the rollouts, rendering the CBDCs irrelevant.

Meanwhile, global adoption of cryptocurrencies—private digital assets—grew by 34 percent in 2023 alone, reaching a total of 580 million users. In Chile, the adoption rate increased from 2.6 percent in 2021 to 9 percent by late 2023. Last year, Chile had the fourth swiftest measured rise in crypto adoption.

There is one notable shortcoming that the Chilean Central Bank report identifies regarding the country’s financial landscape: effective and safe alternatives for transnational payments. International monetary organizations and central banks have struggled to conclude how CBDCs can streamline international transfers, reduce transaction time and fees, and comply with anti-money-laundering policies.

Cryptocurrencies are one of the most efficient alternatives for secure, immediate, and cost-effective transnational payments. However, since these assets are usually digital protocols that run on the internet without the need of a central authority, central banks perceive them as a threat to fiat-currency monopolies and the traditional financial system.

Pursuing a CBDC at this point is like closing the stable after the horse has bolted. Centralized cryptocurrency ripple, for example, is a project that has combined the best of both worlds: self-regulation and transparency alongside disruption. Ripple has become the leading cryptocurrency for cross-border payments of financial institutions. More than 300 banks in 50 countries use Ripple, including some of the biggest banks in the world. Scotiabank Chile and the Latin American division of Banco Santander are among them. The Chilean Central Bank is hardly going to outcompete ripple and sophisticated private banks with customer service and efficiency.

The Chilean Central Bank’s efforts to explore a digital peso are a distraction and add nothing to the development of the country’s financial sector. Instead, Chile should be content with fostering competition and innovation. Sandboxes or special legal regimes can focus on neobanks and crypto-based projects. There are operational crypto and fintech projects already in existence: one need not reinvent the wheel. They portend more benefit in a highly dynamic financial ecosystem than the fool’s errand that is a CBDC for Chile.

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