IMF Highlights ‘Chicken-and-Egg Problem’ Hindering CBDC Adoption

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Illustration depicting the adoption challenges of Central Bank Digital Currencies faced by merchants and consumers.
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IMF Singles Out ‘Chicken-and-Egg Problem’ That Prevents CBDC Adoption

The Central Bank Digital Currencies, according to the International Monetary Fund, may have one strong adoption problem. This “chicken-and-egg problem” was consumers refusing to adopt unless merchant acceptance was ubiquitous; thus, merchants are very hesitant to invest in that technology without very clear consumer demand.

Understanding the ‘Chicken-and-Egg’ Dilemma

The metaphor “chicken-and-egg” has been in continuous use for describing situations whereby, out of two factors interdependent on one another, neither of them should come first. The IMF underlined that, in the case of CBDCs, this was precisely the dilemma and a big obstacle to their wide use.

If consumers are not using the CBDCs, the merchants may be unwilling to accept them. The consumers, in turn, may also refuse to deal with the CBDCs because they do not know where to use them. In that respect, it becomes a self-reinforcing spiral of reluctance – one that must be overcome so that effective adoption can really take place.

What Are CBDCs?

CBDCs are a digital form of a country’s national currency, issued and regulated by a central bank. While cryptocurrencies are decentralized, CBDCs are wholly centered. They will supposedly offer the same functions as physical currency, though in digital form, with the same safety and regulation as a means to keep private digital currencies and payments systems at bay.

Central Banks Push for Modernization

Most central banks worldwide consider CBDCs because of the upgrade of payment systems, an increase in financial inclusion, and a decrease in cash usage. Nevertheless, potential coordination issues are many in retail payments, and products often perform very poorly when stakeholders are hesitant to adopt because they will not be used by others.

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In the case of CBDCs, this would mean that both consumers and merchants may be reluctant to participate without certainty of broad adoption. This dynamic would need central banks to encourage CBDC adoption, in order to be overcome, the IMF says.

Role of Central Banks

While central banks remain the CBDC drivers, the work of creating consensus among stakeholders in aligning expectations can always be done proactively. Most of them have also been discussing the use of a two-tier model in relation to CBDC distribution, whereby intermediaries like commercial banks and payment service providers would play an active role in distribution and attainment by users. Such a design inherently uses existing infrastructures for finance, while at the same time ensuring that oversight remains with central banks.

Engaging Stakeholders

The stakeholder engagement will be very significant in the adoption of CBDCs. It is considered by the IMF that central banks support this process through iterative and inclusive means to understand the requirements and concerns of merchants, intermediaries, and consumers. In addition, this includes dealing with market challenges and attaining a “product-market fit” for CBDCs.

Survey Insights from the Middle East and Central Asia

In June, the IMF polled 19 nations in the Middle East and Central Asia on CBDCs adoption and potential. It concluded that CBDCs could enable financial inclusion and increase the efficiency of international remittances.

The survey received responses from 19 countries, many of which were considered to be in the research phase into CBDC. Some though, such as Bahrain, Georgia, Saudi Arabia, and the United Arab Emirates have gone ahead to a more developed phase, that of the “proof-of-concept”. While Kazakhstan is the most developed after two pilot programs for the digital tenge.

Conclusion

The adoption of CBDCs does not come without challenges, one important feature being the “chicken-and-egg” problem. Significant perceived benefits are needed by both consumers and merchants in being committed to each other to help them break through the circle of doubt. Central banks need to lead in building confidence that CBDCs will represent a workable and appealing option for all parties concerned.

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