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CENTRAL BANK DIGITAL CURRENCY: WHAT FACTORS DETERMINE ITS

ADOPTION?

Article  in  Buletin Ekonomi Moneter dan Perbankan · June 2022

DOI: 10.21098/bemp.v25i1.1979

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 Bulletin of Monetary Economics and Banking, Vol. 25 No. 1, 2022, pp. 1 - 24
p-ISSN: 1410 8046, e-ISSN: 2460 9196

CENTRAL BANK DIGITAL CURRENCY:

WHAT FACTORS DETERMINE ITS ADOPTION?

Novi Maryaningsih*,1, Suahasil Nazara**, Febrio N. Kacaribu***, and

Solikin M. Juhro****

*Corresponding author. Department of Economics, University of Indonesia, Bank Indonesia,

Indonesia. Email: [email protected]
** Department of Economics, University of Indonesia, Indonesia. Email: [email protected]
*** Department of Economics, University of Indonesia, Indonesia. Email: [email protected]
**** Bank Indonesia. Email: [email protected]

ABSTRACT
This paper attempts to explain the differences in Central Bank Digital Currency (CBDC)
adoption across emerging and advanced countries using an ordered probit model.
Based on a cross-country dataset, we show that wholesale CBDC is more advanced
in countries with developed financial markets and greater cross-border transactions.
Retail CBDC is more advanced in countries with lower financial inclusion and a large
informal economy. We further show that different factors affect retail CBDC adoption
across emerging and advanced countries. However, cross-border transactions are
the most crucial factor influencing wholesale CBDC adoption across emerging and
advanced countries.

Keywords: Central bank digital currency; Financial development; Financial inclusion;

Technology adoption.
JEL Classifications: E42; E58; O33.

Article history:
Received : February 12, 2022
Revised : April 07, 2022
Accepted : June 10, 2022
Available Online : June 20, 2022
https://doi.org/10.21098/bemp.v25i1.1979

1
The authors’ opinions in this study are their own and do not necessarily reflect the opinions of Bank
Indonesia.
2 Bulletin of Monetary Economics and Banking, Volume 25, Number 1, 2022

I. INTRODUCTION
This paper attempts to explain the differences in Central Bank Digital Currency
(CBDC) adoption across emerging and advanced countries. Digitization of the
payment system has reshaped the monetary and financial systems’ landscape.
Digital transactions have experienced more accelerated growth over the last
decade and more so during the COVID-19 pandemic, since they do not require
direct contact, thus reducing the risk of transmitting the virus (Alfonso et al., 2021).
However, the payment system’s innovation poses challenges for policymakers.
The increase in digital transactions causes the demand for money to decrease,
impacting the effectiveness of monetary policy and the central bank’s independence
(Prabheesh and Rahman, 2019). The emergence of cryptocurrencies also pressures
policymakers because these currencies may have a negative impact on financial
system stability (Liu and Serletis, 2019). Such challenges have prompted the
central bank to consider issuing CBDCs. The central bank could use CBDC’s
interest rate as a secondary monetary policy tool to affect liquidity in the economy,
and hence enhance monetary policy transmission. 2 Furthermore, the CBDC might
potentially be utilized as a tool for financial inclusion (Zams et al., 2020), allowing
for easier access to the financial system. In addition, the CBDC could provide real-
time economic activity data, shifting the economy from informal3 to formal, and
boosting fiscal resilience through greater tax collection (Shirai, 2019).
Although authorities agree on the feasibility of CBDC adoption, the pace of its
adoption varies by country. Such a difference raises the question of what factors
influence the adoption. Drawn on this background, our study evaluates various
concerns related to CBDC adoption progress across countries. More specifically,
this study investigates what the economic and institutional factors influence the
adoption of CBDCs. This study also examines whether the determinants of CBDC
adoption vary between advanced and emerging countries. Our investigation is
motivated by the following reasons. First, emerging countries are more motivated
to adopt retail CBDC as a complement or replacement for cash to address
financial inclusion and informal economy issues (Barontini and Holden, 2019;
Shirai, 2019). On the other hand, advanced countries tend to be more interested
in adopting wholesale CBDC.4 In countries with developed financial systems, the
advantages of wholesale CBDC will be increasingly apparent. Wholesale CBDC
will improve payment system services to the financial sector. The higher the
financial development of a country, the greater the financial transactions that occur
(Folkerts-Landau and Garber, 1997), thus requiring innovative wholesale payment
solutions. Meanwhile, countries that have implemented real-time settlements
for large-value payments are less interested in implementing wholesale CBDC
because Real-Time Gross Settlement (RTGS) is considered to have met the needs
of their domestic payment systems (Lee et al., 2021).

2
The central bank might issue a CBDC with an interest rate as a complement to the existing policy
rate. See Barrdear and Kumhof (2021) for further discussion.
3
The literature also refers to this as the shadow economy.
4
The Bahamas, China, Ecuador, Cambodia, Ukraine, and Uruguay have carried out retail CBDC pilot
projects. Canada, France, the United Kingdom, Hong Kong, Japan, and Singapore have already
carried out the wholesale CBDC pilot project (Boar et al., 2020).
Central Bank Digital Currency: What Factors Determine Its Adoption? 3

Second, the limitation of the existing payment system also forces the central
bank to look at the possibility of CBDC as a solution. The wholesale payment system
technology, RTGS, has operational limitations such as the operational of RTGS
system is limited to office hours since officer operates it. The Distributed Ledger
Technology (DLT)5 in a wholesale CBDC has advantages over RTGS because it
enables the system to synchronize transaction data automatically, allows for data
traceability, and does not require third party transaction verification (Bank for
International Settlements, 2018), making the settlement faster. In addition, DLT
allows the financial institution to own access to its network’s information, reducing
asymmetric information (Parlour et al., 2020a). The retail payment system has a
complex hierarchy, including involving various payment system service providers
and technologies, which makes it difficult for the central bank to supervise. The
adoption of the retail CBDC is expected to lessen the central bank’s regulatory and
supervisory burden over existing complex retail payment systems (Qian, 2019).
Furthermore, CBDC is the money issued by the central bank in electronic format;
it is peer-to-peer, and universally accessible, i.e., all agents in the economy could
use it to buy goods and services (Davoodalhosseini, 2021). In addition, CBDC is
available 24 hours a day, seven days a week, uses the national currency, and could
have an interest rate (Barrdear and Kumhof, 2021). The CBDC implementation
plans may differ between countries in approach and technology, depending on the
goals and needs of each country (Soderberg, 2022). The CBDC could employ either
centralized or decentralized technology, with the distinction in the authorization
of transaction data.6
Presently, there are two types of CBDC based on its users. The first is the
wholesale CBDC, which is used for transactions between the central bank and
financial institutions or between financial institutions and the second is the retail
CBDC, which could be accessed and used for public transactions (Meaning et al.,
2021). Economic-wide CBDC is applied when a country adopts both wholesale
and retail CBDC. From a survey conducted on 169 countries, no country has
implemented CBDC (Auer et al., 2020a).7 The data showed that most countries are
still in the early stages of CBDC adoption. Only 10% of countries have carried out
economic-wide CBDC pilot projects, and 5% have carried out retail CBDC and
wholesale CBDC pilot projects (Figure 1).

5
A mechanism for recording transactions given a set of rules for network participants that elicits
decentralized consensus on the unique, actual history without the need for an appeal to a trusted
authority.
6
Centralized technology allows only the trusted authority to update transaction data, whereas
decentralization, such as DLT (i.e., blockchain in bitcoin), allows all participants to update transaction
data at the same time. See Kiff et al. (2020) for further discussion.
7
China has expanded the scope of the pilot project to include the use of E-CNY at the Winter Olympics
in February 2022 (www.finextra.com). For recent development of E-CNY, see People’s Bank of China
(2021).
4 Bulletin of Monetary Economics and Banking, Volume 25, Number 1, 2022

Figure 1.
CBDC’s Progress
The figure shows the proportion of CBDC’s adoption progress from 169 countries. The data come from the Bank for
International Settlement.

10% 5%

12%
10%

80% 83%

There is no announced CBDC project There is no announced CBDC project

Public research study of CBDC Public research study of CBDC
Ongoing or completed CBDC's pilot project Ongoing or completed CBDC's pilot project

5%
3%

92%

There is no announced CBDC project

Public research study of CBDC
Ongoing or completed CBDC's pilot project

One possible explanation for countries being careful in the CBDC’s adoption
is to avoid financial instability. The most considerable risk of CBDC is that it could
disrupt the intermediation system by crowding out bank deposits, increasing
credit interest rates , and in turn contracting commercial banking credit to the
real sector (Agur et al., 2021). The CBDC may increase the role of central bank in
allocating economic resources, resulting in broad economic losses if the central
bank is less efficient in allocating resources than the private sector (Bindseil,
2020). Furthermore, the central bank’s issuance of CBDC could disrupt the money
Central Bank Digital Currency: What Factors Determine Its Adoption? 5

creation by commercial banks. Bank financing sources are reduced because of the
public’s ability to shift from deposits to CBDC, leading to lower loan disbursement
(Agur et al., 2021; Kim and Kwon, 2019; Keister and Sanches, 2019).
The limited studies that have attempted to investigate the factors that influence
CBDC adoption across countries are purely descriptive (see, for example, Lee et
al., 2021; Meaning et al., 2021; Bindseil, 2020; and Qian, 2019). We depart from
prior studies by using regression analysis and thus add to the literature in the
following ways. First, when compared to previous studies, our study considers a
much broader set of potential determinants of CBDC adoption, such as financial
development, financial inclusion, cross border transaction, infrastructure,
innovation, macroeconomics, and institutional factors. Second, our paper addresses
the issue of differences in the determinants of CBDC adoption between advanced
and emerging countries. To our knowledge, this is the first study addressing this
issue.
Our analysis regresses the CBDC index from the Bank International Settlements,
which tracks cross-country CBDC adoption in 169 countries on macroeconomic
factors, infrastructure, financial development, and institutional factors averaged
over ten years from 2010 to 2019. Based on an ordered probit model, we revealed
that countries with better developed financial development and higher innovation
capacity are more likely to engage in CBDC projects. In countries with a lower
level of financial inclusion and a larger informal economy, retail CBDC projects
are more advanced. Meanwhile, wholesale CBDC initiatives are farther in
countries with a more open economy. We found that different factors affect the
progress of retail CBDC projects across emerging and advanced countries.8 Retail
CBDC projects are more progressed in emerging countries with higher openness,
innovation capacity, and informal economy. Meanwhile, financial markets and
high non-cash payment behavior significantly impact retail CBDC projects in
advanced countries. However, cross-border transaction is the most crucial factor
influencing wholesale CBDC adoption. Our model passes robustness tests such as
using last observations of the dataset, several indicators for each variable category,
and alternative methods for controlling the skewness of dependent variables.
The rest of the paper is organized as follows. Section II reviews the literature
review, while Section III describes the data and the research methods. Section
IV reports and discusses the empirical results. Section V reports the robustness
checks, and finally, Section VI presents the conclusion and implications.

II. LITERATURE REVIEW

A. Current Payment System and Challenges for Monetary Policy
The payment instrument developed rapidly. In the early development, the barter
system was standard in the pre-modern era. Payment instruments continue to grow
from cash-based to non-cash, digital payment instruments9 through commercial

8
We grouped the countries into advanced and emerging based on International Monetary Fund (IMF)
classifications (see International Monetary Fund, 2022).
9
Digital payment instruments range from paper-based payment instruments like check and card-
based payment instruments like debit cards, credit cards, and e-money.
6 Bulletin of Monetary Economics and Banking, Volume 25, Number 1, 2022

banks’ money and digital currency.10 The dual currency regime model shows
that digital currency will not completely replace fiat currency (Hong et al., 2018).
The high costs of using fiat currency, due to the high inflation rates, will increase
demand for digital currency. Similarly, the high costs of using digital currency will
increase the demand for fiat currency.
The use of digital transactions as a substitute for money causes the demand
for money in the economy to fall, making the money multiplier unstable (Wang
and Wolman, 2016). As a result, monetary policy based on base money becomes
ineffective, especially in countries where monetary aggregates have been difficult
to control (Cohen, 2001). The decline in demand for cash could reduce the central
bank’s income from seigniorage, forcing the central bank to rely on the government
for operational funding (Woodford, 2000). This condition undermines the central
bank’s monetary policy independence since the government must authorize the
cost of policies. This means that the central bank policies must be approved by the
government.
Although the use of cash in advanced countries has decreased, its use has
significantly increased in most emerging countries (Foster et al., 2020). These
changes in cash usage across advanced and emerging countries might reflect the
size of the existing informal economies across these countries. Empirical research
has demonstrated that once the informal sector emerges it is not easy to eradicate
(Eilat and Zinnes, 2002), thus it requires a breakthrough to capture this economic
activity. The increase in digital transactions also increases the financial inclusion
gap for people who do not have formal access to banking, especially the poor and
the elderly (Fabris, 2019).
The latest challenge faced by the central bank is the emergence of
cryptocurrencies, i.e. the digital money issued by private entities. These currencies
have significant price differences across countries and their volatility substantially
impact other financial markets (Liu and Serletis, 2019). Moreover, because they
could be used for domestic and cross-country payments, cryptocurrencies (e.g.
Facebook’s Libra) might have a systemic impact on the financial system and
monetary sovereignty (Auer et al., 2020b).
The COVID-19 outbreak has increased the demand for digital transactions
(Allen, et al., 2022). People are forced to shop online due to various rules restricting
social and economic activities. To illustrate, during a lockdown, contactless
transactions contribute to running the economy; countries with a digital economy
and high discipline have more negligible effects and recover faster from each wave
of COVID-19 (Lee et al., 2021). In addition, the United States began taking the retail
CBDC implementation plan seriously in response to the deteriorating economic
conditions of the COVID-19 pandemic, which is thought to be more effective for
distributing social assistance (Brainard, 2021).
It is becoming increasingly feasible to issue CBDCs to address monetary policy
and payment system constraints. The CBDC could be used as a secondary monetary
policy tool, allowing the central bank to control the money supply more effectively
through interest rates and quantity of CBDC (Barrdear and Kumhof, 2021).
Furthermore, increasing the accessibility of CBDCs by the public will improve

10
This refers to cryptocurrency issuing (e.g., Bitcoin, Ethereum, Litecoin, etc.) by private entities.
Central Bank Digital Currency: What Factors Determine Its Adoption? 7

financial inclusion (Chorzempa, 2021). The CBDC could be accessed via devices
that do not require an internet connection, making it more accessible to the elderly
and to those with restricted internet access. This will cause the informal economy’s
share to decrease since the CBDC would record data on economic activities in
real-time. In addition, the CBDC will strengthen fiscal resilience through tax
collection from previously unrecorded transactions. The documentation of such
an economic activity will support anti-money laundering and help combat the
financing of terrorism (Engert and Fung, 2017).

B. Determinants of CBDC’s Adoption

Despite the authorities agreeing on the future use of CBDCs, their adoption has
varied across countries. This disparity raises the question of what factors influence
CBDC adoption across countries. Auer et al. (2020a) identify CBDC adoption
determinants and find that CBDC projects are primarily found in countries
with a substantial informal economy. Retail CBDC initiatives are found mainly
in countries with high innovation capacity. Furthermore, they found that CBDC
adoption is motivated by increased financial access.
We also review the literature on the factors influencing technology and
financial innovation adoption to identify potential determinants of the adoption
of CBDCs (e.g., Zhou et al., 2019 and Lashitew et al., 2019). In general, the factors
that influence the CBDC adoption are indicators related to financial development,
financial inclusion, cross-border transactions, infrastructures, innovation,
macroeconomic, and institutional conditions.

III. DATA AND RESEARCH METHODS

We included 169 countries in our dataset (see Appendix Table A.1). The CBDC
index, which is the dependent variable, is constructed from a survey performed by
the Bank for International Settlements (Auer et al., 2020a). Independent variables
are the average for 2010 to 2019.11 There are four possibilities for CBDC adoption
represented by the CBDC index: 0 if a country has not announced a CBDC project;
1 if there is research on CBDC; 2 if there is a CBDC pilot project; and 3 if the country
implemented CBDC. However, from the survey, no countries have implemented
CBDC. Thus, there are only three categories in the current progress of the CBDC
adoption: 0, 1, and 2.
We utilized an ordered probit technique estimated by maximum likelihood,
since standard ordinary least squares would produce inconsistent estimates.12 Our
empirical model resembles the following:

(1)

11
Central bank independence index is based on average of 2012 and 2016 data, for the remaining
variables, averages are taken over the years 2010–2019 to smooth out potential year-to-year variations.
See Lashitew et al. (2019) for the discussion.
12
For more on the use of ordered probit, see Kawamura et al. (2021).
8 Bulletin of Monetary Economics and Banking, Volume 25, Number 1, 2022

where CBDCi is the CBDC index that represents the progress of CBDC’s adoption;
β1,⋯,β7 are the coefficients to be estimated; β0 is the intercept and ɛi denotes the
error term. Similarly, FD stands for financial development, indicators of financial
institutions, financial markets, and financial instruments development. The FI
variable is an indicator of financial inclusion, a measurement of individuals’ and
businesses’ access to valuable and affordable financial products and services that
meet their needs. The CB variable is the cross-border transaction indicator, a proxy
for the capital account or trade openness. The INFRA variable is an indicator of
infrastructure and measures the access or quality of infrastructure. Furthermore,
INOV represents innovation variables that measure a country’s innovation
capabilities. The MACRO variable denotes macroeconomic variables, and INST
stands for the institutional variable that includes government quality and central
bank independence.
As far as the explanatory variables are concerned, Table 1 shows their
description and descriptive statistics.13 On average, the share of domestic credit
for advanced countries reached 111.11% of GDP compared to emerging countries,
which was only 44.23% of GDP. Furthermore, there is a significant difference
in financial inclusion between advanced and emerging countries. Advanced
countries additionally have higher cross-border transaction sizes and capital
account openness. The ratio of exports to GDP of advanced countries reached
66.89%, while emerging countries was only 38.87%, on average.

13
Details of descriptive statistics are available on request.
 Table 1.
Descriptive Statistics
This table reports selected descriptive statistics for the variables considered in this study. The capital account openness is measured by the Chinn Ito index, ranging from 0 to 1; a
higher index means higher capital account openness (Chinn and Ito, 2020). Innovation data were derived from Global Innovation Index from World Intellectual Property Organization
(WIPO), ranging between 0 to 100, a higher index means higher innovation capability. Informal economy data are obtained from Medina and Schneider (2019) (www.cesifo.org). Data
of central bank independence are from Institutional Profile Database (IPD) and Garriga and Rodriguez (2020), range between 0=no independence to 4=strong independence (IPD) and
0=no independence to 1=strong independence (Garriga Index). The rest of the data comes from the World Bank (https://data.worldbank.org).

All Samples Advanced Countries Emerging Countries

Description
Variables No. of obs. Mean No. of obs. Mean No. of obs. Mean
FD - Financial Development
DOMCR Domestic credit (% GDP) 150 60.050 34 111.108 113 44.233
PRCR Private credit (% GDP) 149 58.396 33 101.946 113 45.710
FI - Financial Inclusion
COMBANK Commercial bank (per 100,000 adults) 153 18.205 35 29.887 115 14.720
CC Credit card (% age 15+) 138 19.157 34 46.846 102 9.598
IPAY Internet payment (% age 15+) 132 24.046 34 58.107 97 11.692
ATM ATM access (per 100,000 adults) 153 51.011 34 94.174 116 36.656
CB - Cross border transaction
CAO CA openness (index) 146 0.589 33 0.947 110 0.489
TRADE Trade openness (% GDP) 188 0.946 36 1.306 116 0.872
INFRA - Infrastructures
ELAC Electricity access (% population) 164 86.318 36 98.301 120 82.148
ELQUAL Electricity quality (% of output) 126 12.838 35 6.773 89 15.297
MCEL Mobile cellular (per 100 adult people) 163 106.778 36 127.638 120 101.220
FBROAD Fix broadband (per 100 adult people) 162 13.020 35 31.810 119 7.046
INOV - Innovation
Central Bank Digital Currency: What Factors Determine Its Adoption?

INOV Innovation (index) 132 37.055 33 52.930 98 31.521

PATENT Patent applications (thousand) 135 12.975 36 18.641 98 9.642
MACRO - Macroeconomics
GDP GDP per capita (constant thousand 2010 US$) 162 16.255 35 43.422 119 7.039
HHCONS HH final consumption (% GDP) 151 62.740 35 53.302 110 66.138
SHADOW Informal economy (% GDP) 138 26.346 35 14.229 101 30.468
POP Population (million people) 165 42.187 36 27.793 121 48.733
INST - Institution
REG Regulatory quality (index) 169 0.079 37 1.306 121 -0.327
GOVT Government effectiveness (index) 169 0.101 37 1.330 121 -0.317
CBIIPD CBI IPD (index) 131 2.752 35 3.700 94 2.420
9

CBIGAR CBI Garriga (index) 149 0.060 33 0.714 113 0.575

10 Bulletin of Monetary Economics and Banking, Volume 25, Number 1, 2022

Advanced and emerging countries have almost the same access to electricity
infrastructure, but the quality of electricity in emerging countries is lower. The
mobile subscription gap in advanced countries and emerging markets is negligible.
Still, the number of internet users and the quality of network infrastructure in
advanced countries are much higher. A striking difference is also observed in
innovation capacity. Emerging countries have a much larger informal economy
share than advanced countries. In contrast, the difference in the percentage of
private consumption to GDP is insignificant. Advanced countries also have better
institutions than emerging countries.

IV. EMPIRICAL RESULTS

Table 2 shows that financial development is positively related to CBDC adoption.
The finding is consistent with the finding of previous studies (Auer et al., 2020a;
Carstens, 2021; Parlour, et al., 2020b). The results suggest that the higher the level
of financial development, the more likely a country will adopt a CBDC. The results
show that financial inclusion is negatively correlated with retail CBDC adoption.
That is, countries with lower financial inclusion are likely to be more advanced in
retail CBDC adoption.
Cross-border transactions are positively correlated with the progress of
wholesale CBDC adoption, suggesting that the more prominent the cross-border
transactions in a country are, the higher the need for alternative wholesale cross-
border payment solutions that are more efficient than those currently available
(Bank for International Settlement et al., 2021). The finding highlights the possibility
that wholesale CBDC could be developed as an alternative solution for cross-border
transactions (Auer et al., 2021a). Surprisingly, we found that electricity does not
influence CBDC adoption. Although we use different indicators of electricity (i.e.
electrification ratio and electricity quality), none of them significantly influenced
CBDC adoption. This result is most likely because the countries included in our
analysis have adequate electricity access and hence access to electricity may not be
a relevant determining factor for CBDC adoption.
Furthermore, we find that digital infrastructure has only a marginally
significant impact on economic-wide CBDC adoption. As such, this suggests
that digital infrastructure may have a more negligible effect on CBDC adoption
than previously thought. Furthermore, we found a strong positive relationship
between innovation and retail CBDC adoption. That is, the higher the innovation
capacity, the higher the likelihood of retail CBDC adoption. Meanwhile, the
relation between innovation and wholesale CBDC adoption is not significant. This
result implies that the implementation of retail CBDC would be more challenging
than wholesale CBDC and would necessitate more innovation. Since the existing
retail payment system has a complex hierarchy and the retail CBDC is used for
broader public transactions, the public will be involved in the implementation.
Central Bank Digital Currency: What Factors Determine Its Adoption? 11

Table 2.
Results for the Full Sample
This table reports the coefficient of the ordered probit regression. The dependent variable is the CBDC index, and the
independent variables are listed in Table 1. The asterisks *, **, and *** denote statistical significance at the 10%, 5%,
and 1% levels, respectively. /cut1 is the estimated cut point on the latent variable used to differentiate low CBDC index
from middle and high CBDC index, meanwhile /cut2 to differentiate middle CBDC index from high CBDC index,
when values of the predictor variables are evaluated at zero. The likelihood ratio chi-square with a p-value of 0.000
tells that our model is statistically significant.

Economic wide Retail Wholesale

CBDC Project CBDC Project CBDC Project
Variables
Standard Standard Standard
Coefficient Coefficient Coefficient
error error error
DOMCR 0.012* 0.006 0.011** 0.005
PRVCR 0.025* 0.018
COMBANK -0.026* 0.015 -0.024* 0.014
CC 0.009 0.017
IPAY -0.069** 0.032
ATM 0.008 0.007
CAOPEN 1.949** 0.781 4.266* 2.375
TRADE -1.249** 0.572
ELACCESS 0.012 0.018
ELQUAL 0.066 0.041
MOBCELL 0.017* 0.009 0.014 0.009
FIXBROAD -0.023 0.067
INOV 0.127** 0.054 0.149*** 0.054 -0.079 0.103
HHCONS -0.031* 0.019 -0.004 0.017 -0.160** 0.067
SHADOW 0.088*** 0.027 0.068*** 0.024 0.013 0.046
POP 0.438*** 0.137 0.137 0.148 1.118*** 0.424
REG -0.852* 0.500 -0.469 0.510 2.362** 1.106
CBIGAR -1.676 1.044
CBIIPD -0.397* 0.229 0.405 0.440
/cut1 16.720*** 4.047 11.050*** 3.736 38.680 33.860
/cut2 17.710*** 4.100 12.38*** 3.796 39.080 33.870
Observations 109 103 102
Log likelihood 48.131 -45.779 -20.304
LR chi2 70.190 52.250 37.040
Prob > chi2 0.000 0.000 0.000
Pseudo R2 0.422 0.363 0.477

We found mixed results regarding the relation between household

consumption and CBDC adoption. The share of household consumption has a
negative and significant correlation with wholesale CBDC adoption, but an
insignificant correlation with retail CBDC adoption. This finding is consistent with
previous research indicating that the ability to consume is influenced by financial
development (see Liu et al., 2021; Wang et al., 2018). The higher the level of financial
development, the greater the capacity for consumption (Li et al., 2020). This means
that countries with high consumption tend to have high financial development,
necessitating the need for financial institutions to have an alternative to wholesale
12 Bulletin of Monetary Economics and Banking, Volume 25, Number 1, 2022

payments. We found strong evidence that the informal economy is highly correlated
with the progress of retail CBDC adoption. Our model shows that countries with
a larger informal economy have a higher probability of adopting retail CBDC. The
finding supports previous research, which found that authorities use retail CBDCs
as an alternative solution for tracking informal economic financial transaction
data (Auer et al., 2020a). Furthermore, policymakers could utilize granular, high-
frequency retail CBDC transaction data to improve forecasting accuracy or other
real sector policies. Finally, the population size significantly impacts economic
and wholesale CBDC adoption progress, but the impact on retail CBDC adoption
progress is weak, suggesting that population size has little effect on retail CBDC
adoption. This latter finding corroborates existing research, which found that
other factors, such as education, community networks, and geographic variations,
have a greater influence on the decision to adopt and use financial innovation than
population size (Lee et al., 2022; An et al., 2022).
We were also surprised by the results for the institutional control variables.
Regulatory quality is detrimental to economic-wide CBDC projects but beneficial
to wholesale CBDC projects. The authority’s role is more dominant or involves
developing wholesale CBDC projects, which emphasizes the critical role of
coordination and harmonization between countries when implementing wholesale
CBDCs, given that each country’s wholesale payment system has its own set of
systems and rules. Furthermore, central bank independence harms retail CBDC
projects. This possibility stems from concerns about diminishing seigniorage
from printing money if the central bank issues retail CBDC forcing it to rely on
government financing, perhaps jeopardizing its independence (Ferré, et al., 2018;
Nolivos and Vuletin, 2014). Wholesale CBDC, on the other hand, is positively
associated with central bank independence. As a result, wholesale CBDC projects
are more likely to be conducted by central banks with strong independence, but
not retail CBDC projects. Our estimations have an excellent prediction value,
deviations of 1% to 5% from the actual predictions.14
To understand the differences in the determinants of CBDC adoption across
emerging and advanced countries, we performed the estimations by subdividing
the samples into emerging and advanced countries. The intuition is that the effect
of some variables, such as financial inclusion and informal economy, are thought
to have a greater impact on CBDC adoption in emerging countries (see Boar, et
al., 2021; Lee et al., 2021). In contrast, since advanced countries have high financial
inclusion rates and smaller shadow economies, their CBDC adoption decisions
should not be influenced by these factors. Table 3 shows empirical results on
the factors affecting economic-wide CBDC projects in emerging and advanced
countries. The development of financial markets has a strong influence on the
progress of economic-wide CBDC projects in advanced countries, but the influence
is weak in emerging markets.

14
The model predictions are available upon request.
Central Bank Digital Currency: What Factors Determine Its Adoption? 13

Table 3.
Results for Emerging vs. Advanced Countries: Economic-Wide CBDC
This table reports the coefficient of the ordered probit regression. The dependent variable is the CBDC index, and the
independent variables are listed in Table 1. The asterisks *, **, and *** denote statistical significance at the 10%, 5%,
and 1% levels, respectively. /cut1 is the estimated cut point on the latent variable used to differentiate low CBDC index
from middle and high CBDC index, meanwhile /cut2 to differentiate middle CBDC index from high CBDC index,
when values of the predictor variables are evaluated at zero. The likelihood ratio chi-square with a p-value of 0.000
tells that our model is statistically significant.

Emerging Countries Advanced Countries

Variables
Coefficient Standard Error Coefficient Standard Error
DOMCR 0.013 0.010 0.019** 0.010
COMBANK -0.057* 0.030 0.001 0.028
CC -0.055 0.054 -0.045 0.030
CAOPEN 2.657** 1.042 1.375 5.177
MOBCELL 0.034** 0.015 -0.031 0.036
INOV 0.257* 0.134 0.109 0.114
HHCONS -0.031 0.025 -0.085 0.054
SHADOW 0.083** 0.032 0.179 0.144
POP 0.311 0.200 0.921** 0.361
REG -1.856** 0.815 3.176 2.516
/cut1 20.280*** 6.297 20.400* 11.510
/cut2 21.030*** 6.351 22.190* 11.620
Observations 78 30
Log likelihood -24.577 -15.587
LR chi2 43.38 28.53
Prob > chi2 0.000 0.002
Pseudo R2 0.469 0.478

The results show that financial inclusion and informal economy affect
the progress of economic-wide CBDC adoption in the emerging countries. In
contrast, we find no significant effect of financial inclusion and informal economy
on economic-wide CBDC adoption in the advanced countries. These findings
are consistent with the hypothesis that financial inclusion and the informal
economy have a greater impact on economic-wide CBDC adoption in emerging
countries, but not in advanced countries. In addition, emerging countries with
higher proportions of mobile phone users, innovation, economic openness, and
less stringent regulations are more likely to adopt economic-wide CBDC projects.
On the contrary, advanced countries with large populations are more likely to be
more distinguished in economic-wide CBDC projects.
14 Bulletin of Monetary Economics and Banking, Volume 25, Number 1, 2022

Table 4.
Results for Emerging vs. Advanced Countries: Retail CBDC
This table reports the coefficient of the ordered probit regression. The dependent variable is the CBDC index, and the
independent variables are listed in Table 1. The asterisks *, **, and *** denote statistical significance at the 10%, 5%,
and 1% levels, respectively. /cut1 is the estimated cut point on the latent variable used to differentiate low CBDC index
from middle and high CBDC index, meanwhile /cut2 to differentiate middle CBDC index from high CBDC index,
when values of the predictor variables are evaluated at zero. The likelihood ratio chi-square with a p-value of 0.000
tells that our model is statistically significant.

Emerging Countries Advanced Countries

Variables
Coefficient Standard Error Coefficient Standard Error
DOMCR 0.013 0.009 0.031** 0.016
COMBANK -0.035 0.026 0.025 0.066
CC 0.025 0.066 0.075* 0.044
CAOPEN 1.691* 0.931 -0.863 9.292
ELQUAL 0.046 0.050 -0.069 0.551
MOBCELL 0.016 0.011 -0.103 0.090
INOV 0.144* 0.087 0.419* 0.232
HHCONS 0.017 0.022 -0.099 0.082
SHADOW 0.053** 0.027 0.524 0.335
POP 0.377** 0.186 0.961 0.644
REG -1.348** 0.590 3.553 4.541
/cut1 58.450** 26.800 9.655 18.750
/cut2 22.190* 11.620 10.080 18.760
Observations 86 32
Log likelihood -8.961 -13.076
LR chi2 18.93 15.85
Prob > chi2 0.008 0.026
Pseudo R2 0.514 0.377

Table 4 shows the differences in the factors that affect the progress of retail
CBDC projects in emerging and advanced countries. Our results show that
the informal economy, population, and regulatory quality are the most critical
variables that affect retail CBDC projects in emerging countries. Meanwhile, the
degree of openness and innovation capacity weakly affect retail CBDC projects
in emerging countries. On the other hand, retail CBDC projects in advanced
countries are strongly influenced by the level of development of financial markets.
Non-cash payment behavior and innovation capacity only weakly affect advanced
countries’ retail CBDC projects. Therefore, emerging countries with larger informal
economies, larger populations, and a more prominent role of authorities are more
likely to carry out retail CBDC projects.
Central Bank Digital Currency: What Factors Determine Its Adoption? 15

Table 5.
Results for Emerging vs. Advanced Countries: Wholesale CBDC
This table reports the coefficient of the ordered probit regression. The dependent variable is the CBDC index, and the
independent variables are listed in Table 1. The asterisks *, **, and *** denote statistical significance at the 10%, 5%,
and 1% levels, respectively. /cut1 is the estimated cut point on the latent variable used to differentiate low CBDC index
from middle and high CBDC index, meanwhile /cut2 to differentiate middle CBDC index from high CBDC index,
when values of the predictor variables are evaluated at zero. The likelihood ratio chi-square with a p-value of 0.000
tells that our model is statistically significant.

Emerging Countries Advanced Countries

Variables
Coefficient Standard Error Coefficient Standard Error
DOMCR -0.004 0.012 0.010 0.010
COMBANK -0.074 0.067 -0.005 0.021
CC -0.165* 0.097 0.019 0.035
TRADE 2.398* 1.404 0.886* 0.473
GDP 3.681** 1.687 -0.364 1.530
SHADOW 0.050 0.047 -0.057 0.120
POP 1.343* 0.733 0.629** 0.309
/cut1 19.110*** 6.001 40.202 26.100
/cut2 19.820*** 6.049 44.080 26.850
Observations 72 30
Log likelihood -26.664 -8.632
LR chi2 23.39 30.84
Prob > chi2 0.016 0.001
Pseudo R2 0.305 0.641

In contrast to retail CBDCs, the factors that influence the progress of wholesale
CBDCs tend to be the same between emerging and advanced countries. These
factors are cross-border transactions and population. Meanwhile, the income
per capita variable only affects the development of wholesale CBDC projects in
emerging countries (Table 5). Our model for emerging and advanced countries
demonstrates good prediction model values, with deviation of 1% to 5% from the
actual predictions.
Policymakers should consider that there are fundamental differences in the
motivations of emerging and advanced countries in developing retail CBDCs. The
development of financial markets and non-cash behavior are the dominant factors
influencing retail CBDC adoption in advanced countries. The CBDC is considered
one of the tools for strengthening the current payment infrastructure to respond
to the increasing need for connectivity due to communication innovations and
the disintegration of financial sector services (Bank for International Settlement
et al., 2021; Auer et al., 2021b). The nature of retail CBDC in advanced countries is
an alternative to current retail payments. For emerging countries, there is a need
to use retail CBDC to enhance financial inclusion and to capture transaction data
from the sizable informal economy.
Meanwhile, wholesale CBDC projects in both emerging and advanced
countries are influenced by the need for solutions to cross-border transactions,
which are currently considered inefficient (Boar, et al., 2020; Soderberg, 2022).
This cross-border transaction solution is vital for emerging countries with high
cross-border transaction costs and low speeds (Obstfeld, 2021). Furthermore,
16 Bulletin of Monetary Economics and Banking, Volume 25, Number 1, 2022

considering that these cross-border transactions involve the country of origin and
destination, coordination between countries is needed to implement the cross-
border CBDC project.

V. ROBUSTNESS CHECKS
We conducted robustness tests by using the last point data and used several
indicators for each variable category. In addition, we present a robustness test
based on the ordered logit and zero-inflated ordered probit (i.e., Cour-Thimann &
Jung, 2021; Dong et al., 2021) to tackle potential skewness of the dependent variable.
The robustness test results are consistent with our estimation results.15 Financial
development strongly influences the progress of wholesale CBDC adoption in
advanced countries. However, this is not the case in emerging countries. The
progress of retail CBDC projects is more advanced in emerging countries with
lower levels of financial inclusion.

VI. CONCLUSION AND IMPLICATIONS

This paper attempts to explain the differences in CBDC adoption across emerging
and advanced countries using an ordered probit model. The results showed that
wholesale CBDC projects are more advanced in countries with more developed
financial markets and greater cross-border transactions. Conversely, countries
with lower levels of financial inclusion, larger informal economies, and higher
innovation are more advanced in CBDC retail projects. Moreover, there are
differences in the factors that affect the progress of retail CBDC projects for
advanced and emerging countries. Retail CBDC projects are more accelerated
in emerging countries with a higher degree of openness, innovation capacity,
informal economy, and a more significant role of authorities. Meanwhile, retail
CBDC projects in advanced countries are more influenced by the development of
financial markets and high non-cash payment behavior. However, cross-border
transactions are the most dominant factor influencing wholesale CBDC projects in
advanced and emerging countries.
Our study provides guidance to policymakers in exploring the opportunities
and challenges involved in CBDC adoption and has important policy implications.
Our results may suggest that financial development, financial inclusion, innovation,
and institutional characteristics are more critical determinants of CBDC adoption
across countries than other factors. The development of financial markets has led
to more significant financial transactions. Thus, alternative payment solutions,
both wholesale and retail, are required. There is also a need to improve innovation
capacity for countries to engage in CBDC projects. The heightened role of
coordinating and harmonization is required for the development and adoption of
CBDCs, especially wholesale CBDC projects.
Another finding from our research is that retail CBDC is most likely to be used
as an alternative solution for financial inclusion in emerging countries. Wholesale
CBDC, on the other hand, is found to be a viable alternative to the current inefficient

15
The estimates are available on request.
Central Bank Digital Currency: What Factors Determine Its Adoption? 17

cross-border payment systems. As a result, authority is critical when engaging in

CBDC projects, particularly wholesale CBDC projects.
This study has limitations that could be explored further in future research.
For instance, the number of variables collected and analyzed is limited. Future
studies should expand the number of variables to complement our study. The
second limitation of our study is that sudden and rapid changes in central bank
decisions could affect the conclusions and hence future studies should consider
this.

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Central Bank Digital Currency: What Factors Determine Its Adoption? 21

APPENDIX

Table A.1
Variable Description
This table reports variable descriptions and sources of the data used in this study

Abbreviations Full Form Data Description Sources

0: There is no announced CBDC
ECOWIDE Economic wide CBDC project
index 1: Public research study of CBDC
Auer et al., 2020a
RETAIL Retail CBDC index 2: Ongoing or completed CBDC’s
WHOLESALE Wholesale CBDC index pilot project
3: Live CBDC
Domestic credit to the private sector World Development
Domestic credit
DOMCR by banks, calculated as the percentage Indicator (WDI),
of GDP processed
Private credit by deposit money Global Financial
Private credit
PRCR banks, calculated as the percentage Development (GFD),
of GDP processed
Number of commercial bank branches
COMBANK Commercial bank per 100,000 adults WDI
Percentage of adults who own a credit
CC Credit card card Global Financial
Percentage of adults who used Inclusion (GFI)
IPAY Internet payment the internet to pay bills or to buy GFI
something online in the past 12
months
ATM ATM access Number of Automated teller machines GFD
(ATMs) per 100,000 adults
Chinn Ito Index, is an index that
CAO Capital account Chinn and Ito (2020)
measures a country’s capital account
openness
openness. Index normalized from 0 to
1; a higher index means higher capital
account openness
The sum of imports and exports over
TRADE Trade openness WDI, processed
GDP
Percentage of population who have
access to electricity
ELAC Electricity access WDI
Percentage of electric power
transmission and distribution losses
ELQUAL Electricity quality WDI
from its output
Gross mobile cellular subscriptions
rates refer to the percentage of adults
MCEL Mobile cellular WDI
in a country with a subscription to
subscription
mobile phones
Fixed broadband subscriptions rates
refer to the percentage of adults in
FBROAD Fix broadband WDI
a country with a subscription to fix
broadband access
22 Bulletin of Monetary Economics and Banking, Volume 25, Number 1, 2022

Table A.1
Variable Description

Abbreviations Full Form Data Description Sources

INOV Innovation index Global Innovation Index (GII) ranks World Intellectual
world economies according to their Property
innovation capabilities. The range Organization (WIPO)
between 0 to 100, a higher index
means higher innovation capability.
Number of residents’ patent
PATENT Patent applications applications (ln) WDI, processed
GDP per capita in constant 2010 US$
GDP GDP per capita WDI, processed
(ln)
Households’ and NPISHs’ final
HHCONS Household final WDI, processed
consumption expenditure, calculated
consumption
as the percentage of GDP
Size of the shadow economy,
SHADOW Shadow economy Medina, L &
calculated as the percentage of GDP
Schneider, F (2019)
Population size, which reflects the size
POP Population WDI, processed
of the market (ln)
Regulatory quality, capturing
perceptions of the ability of the Worldwide
REG Regulatory quality
government to formulate and Governance
implement sound policies and Indicators (WGI)
regulations that permit and promote
private sector development. Index
from -2,5 to 2,5, the higher the index,
the better regulatory quality.
Government effectiveness, capturing
perceptions of the quality of public
GOVT Government
services, the quality of the civil service WGI
effectiveness
and the degree of its independence
from political pressures, the
quality of policy formulation and
implementation, and the credibility
of the government’s commitment
to such policies. Index from -2,5 to
2,5, the higher the index, the better
government effectiveness.
Central bank independence index,
CBIIPD CBI IPD
0=no independence, 4=strong Institutional Profile
independence Database
CBIGAR CBI Garriga
Central bank independence index, Garriga and
0=no independence, 1=strong Rodriguez (2020)
independence
Central Bank Digital Currency: What Factors Determine Its Adoption? 23

Table A.2.
List of Countries
This table reports 169 sample countries used in this study

Afghanistan
El Salvador Liberia
Albania
Estonia Libya
Algeria Serbia
Eswatini Lithuania
American Samoa Seychelles
Ethiopia Luxembourg
Argentina Sierra Leone
Fiji Macao SAR, China
Armenia Singapore
Finland Madagascar
Aruba Slovak Republic
France Malawi
Australia Slovenia
French Guiana Malaysia
Austria Solomon Islands
Gambia, The Maldives
Azerbaijan Somalia
Georgia Malta
Bahamas, The South Africa
Germany Mauritania
Bahrain Spain
Ghana Mauritius
Bangladesh Sri Lanka
Greece Mexico
Barbados Sudan
Greenland Moldova
Belarus Suriname
Guatemala Mongolia
Belgium Sweden
Guinea Morocco
Belize Switzerland
Guyana Mozambique
Bermuda Syrian Arab Republic
Haiti Myanmar
Bhutan Taiwan, China
Honduras Namibia
Bolivia Tajikistan
Hong Kong SAR, China Nauru
Bosnia and Tanzania
Hungary Nepal
Herzegovina Thailand
Iceland Netherlands
Botswana Tonga
India New Zealand
Brazil Trinidad and Tobago
Indonesia Nicaragua
Brunei Darussalam Tunisia
Iran, Islamic Rep Nigeria
Bulgaria Turkey
Iraq Niue
Cabo Verde Turkmenistan
Ireland North Macedonia
Cambodia Tuvalu
Israel Norway
Canada Uganda
Italy Oman
Cayman Islands Ukraine
Jamaica Pakistan
Chile United Arab Emirates
Japan Panama
China United Kingdom
Jordan Papua New Guinea
Colombia United States
Kazakhstan Paraguay
Comoros Uruguay
Kenya Peru
Costa Rica Uzbekistan
Kiribati Philippines
Croatia Vanuatu
Korea, Dem People’s Rep Poland
Cuba Venezuela, RB
Korea, Rep Portugal
Cyprus Vietnam
Kuwait Qatar
Czech Republic Virgin Islands (US)
Kyrgyz Republic Reunion
Denmark Yemen, Rep
Lao PDR Romania
Djibouti Zambia
Latvia Russian Federation
Dominican Republic Zimbabwe
Lebanon Samoa
Ecuador
Lesotho Saudi Arabia
Egypt, Arab Rep
 24 Bulletin of Monetary Economics and Banking, Volume 25, Number 1, 2022

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