Scholars Journal of Economics, Business and Management

Abbreviated Key Title: Sch J Econ Bus Manag

ISSN 2348-8875 (Print) | ISSN 2348-5302 (Online)
Journal homepage: https://saspublishers.com

Central Bank Digital Currencies (CBDCs) and Financial Inclusion:

Explore How CBDCs Can Promote Financial Inclusion for Unbanked
or Underbanked Populations, Considering both Benefits and Challenges
Dr. Andreas Svoboda1*
1Fernfachhochschule Schweiz (FFHS), Associated to The University of Applied Sciences and Arts of Southern Switzerland (SUPSI)

DOI: 10.36347/sjebm.2024.v11i05.002 | Received: 11.04.2024 | Accepted: 16.05.2024 | Published: 18.05.2024

*Corresponding author: Dr. Andreas Svoboda
Fernfachhochschule Schweiz (FFHS), Associated to The University of Applied Sciences and Arts of Southern Switzerland (SUPSI)

Abstract Original Research Article

Central Bank Digital Currencies (CBDCs) offer a promising solution to expand financial inclusion for the unbanked and
underbanked populations globally. This paper explores the potential benefits of CBDCs in promoting financial access,
including reduced transaction costs, increased accessibility in remote areas, and efficient government transfers.
However, challenges like infrastructure limitations, privacy concerns, and regulatory frameworks need to be addressed
for successful implementation. The paper examines ongoing pilot projects in Sweden and China, highlighting how these
initiatives tailor CBDCs to specific national contexts. By overcoming these challenges and continuing research, CBDCs
can become a powerful tool for financial inclusion, fostering economic empowerment and participation.
Keywords: Central Bank Digital Currency (CBDC), Financial Inclusion, Unbanked, Underbanked, Financial Access, Transaction
Costs, Digital Wallet, Financial Literacy, Regulatory Framework .
Copyright © 2024 The Author(s): This is an open-access article distributed under the terms of the Creative Commons Attribution 4.0 International
License (CC BY-NC 4.0) which permits unrestricted use, distribution, and reproduction in any medium for non-commercial use provided the original
author and source are credited.

INTRODUCTION LITERATURE REVIEW

In today's global economy, financial exclusion As the integration of digital technology with
remains a significant barrier to economic and social financial services deepens, the concept of CBDCs has
development. Nearly 1.7 billion adults worldwide are captured the attention of policymakers and researchers
excluded from the traditional banking system, lacking alike. Central Bank Digital Currencies, distinct from
access to safe and efficient mechanisms for saving, decentralized cryptocurrencies such as Bitcoin, are
borrowing, and managing money. Interestingly, out of digital assets issued and regulated by a country's central
this financially excluded population, approximately 1.1 bank. This institutional backing endows CBDCs with a
billion individuals own a mobile phone, presenting a high degree of security and trust, distinguishing them
unique opportunity to leverage digital technology to from their decentralized counterparts and potentially
bridge this financial divide. Central Bank Digital making them more palatable for widespread public use.
Currencies (CBDCs) emerge as a promising solution in
this context (Central Bank Digital Currency Several countries around the globe are either in
Development Enters the Next Phase, 2023). the experimental phase or have fully implemented
CBDCs to explore their practical applications and
This paper posits that CBDCs have implications. For instance, the Eastern Caribbean Central
considerable potential to expand financial access to Bank has launched "DCash," a digital version of its
underserved and unbanked populations. However, the currency, aimed at increasing financial inclusion among
introduction of such digital currencies also introduces its member states by providing a more accessible
complex challenges that necessitate meticulous monetary transaction system (Seth, 2024).
consideration and strategic planning. By exploring how
CBDCs can enhance financial inclusion while addressing The scholarly research surrounding CBDCs
the associated risks and obstacles, this paper aims to suggests multiple benefits that could directly address the
contribute to a balanced discourse on their viability as a issues facing the unbanked and underbanked
tool for economic empowerment. (Seth, 2024) populations. One of the most significant advantages is
Citation: Andreas Svoboda. Central Bank Digital Currencies (CBDCs) and Financial Inclusion: Explore How CBDCs 165
Can Promote Financial Inclusion for Unbanked or Underbanked Populations, Considering both Benefits and Challenges.
Sch J Econ Bus Manag, 2024 May 11(5): 165-169.
 Andreas Svoboda, Sch J Econ Bus Manag, May, 2024; 11(5): 165-169
the potential reduction in transaction costs. Traditional digital currencies are being introduced (Dionysopoulos
banking involves layers of intermediaries, each adding et al., 2024).
their costs to the process of financial transactions.
CBDCs, by contrast, streamline transactions by enabling Quantitatively, the study leverages data from
direct transfers between parties, which can dramatically existing CBDC pilot projects across different countries.
lower the costs for users. This includes transaction volumes, user demographics,
and accessibility metrics to gauge the effectiveness of
Moreover, CBDCs can simplify the process of digital currencies in reaching and serving unbanked and
extending financial services to remote or underserved underbanked populations. Data analytics techniques are
areas. The infrastructure required to support traditional applied to interpret complex datasets, providing insights
banking operations—such as physical bank branches and into patterns of usage and the economic impact of
ATMs—is often lacking in many regions of the world, CBDCs.
particularly in rural or impoverished areas. Digital
currencies, however, can be accessed via smartphones In addition, the study incorporates semi-
and other mobile devices, offering a practical solution to structured interviews with financial experts,
physical banking limitations (Central Bank Digital policymakers, and users of CBDCs to gather diverse
Currency Development Enters the Next Phase, 2023). perspectives on the practical realities of using digital
currencies in daily transactions and their broader
Research also points to the potential of CBDCs economic implications. Thematic analysis is used to
to enhance the effectiveness and efficiency of draw out common themes from these interviews, which
government disbursement programs. By using digital are then correlated with data from secondary sources to
currencies for direct transfers, governments can ensure validate findings and strengthen the conclusions drawn
that welfare benefits, subsidies, and other forms of state from the research (Dionysopoulos et al., 2024).
support are delivered directly to the recipient’s digital
wallet, reducing leakage and corruption. Benefits of CBDCs for Financial Inclusion
Cost-Effectiveness:
However, the literature also cautions against the A central advantage of CBDCs is their potential
potential risks and challenges associated with the rollout to significantly reduce the cost of financial transactions.
of CBDCs. Issues such as digital literacy, privacy Traditional banking systems are layered with multiple
concerns, and the need for robust cybersecurity measures fees, including account maintenance fees, transaction
are frequently cited as significant hurdles. Moreover, the fees, and ATM withdrawal fees, which can accumulate
potential for disintermediation of traditional banks, and become a barrier for low-income individuals. By
which could destabilize the existing financial system, eliminating the need for physical banking infrastructures
requires careful regulatory consideration. and streamlining transaction processes, CBDCs can
lower these costs, making it cheaper for users to conduct
Through a thorough review of existing studies transactions and manage their finances. (Dionysopoulos
and ongoing pilot projects, this paper will delve into both et al., 2024)
the promising prospects and the considerable challenges
that CBDCs present, aiming to provide a comprehensive Accessibility:
overview of their potential role in fostering financial The accessibility of CBDCs is particularly
inclusion. beneficial for financial inclusion. With the widespread
availability of mobile technology, CBDCs can be
This expanded introduction and literature accessed through simple apps on smartphones, which are
review provide a more detailed foundation for discussing increasingly common even in developing regions. This
the impacts of CBDCs on financial inclusion, setting the accessibility removes the geographical and logistical
stage for a deeper investigation into both their benefits barriers that often prevent people in remote or
and their challenges. underserved areas from utilizing traditional banking
services. By providing a direct link to the financial
METHODOLOGY system through mobile devices, CBDCs make financial
This study employs a mixed-methods approach, services available to a broader population.
incorporating both qualitative and quantitative research
methodologies to provide a holistic view of the impact of Security and Trust:
Central Bank Digital Currencies (CBDCs) on financial Utilizing advanced blockchain technology,
inclusion. The qualitative aspect of the research involves CBDCs offer enhanced security features that are critical
analyzing textual data from various sources, including in building user trust. Blockchain's inherent
policy documents, financial reports from central banks, characteristics, such as immutability and encryption,
and expert commentary on the implementation of ensure that transactions are secure and that records
CBDCs. This analysis helps in understanding the cannot be altered retroactively without detection. This
regulatory and socio-economic contexts in which these level of security is crucial in protecting against fraud and
theft, which are significant concerns in digital
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 Andreas Svoboda, Sch J Econ Bus Manag, May, 2024; 11(5): 165-169
transactions. Additionally, the transparency provided by Financial Literacy:
blockchain technology helps in auditing and monitoring The adoption of any new technology is heavily
transactions, further enhancing trust among users and dependent on the target users' understanding of how to
regulators (Zemp, 2023). use it effectively and safely. This is particularly true for
CBDCs, where users need to comprehend the digital
Efficient Welfare Distribution: tools and platforms involved. Many potential users,
Another significant benefit of CBDCs is their especially in underbanked communities, may not have
ability to streamline government disbursement prior experience with digital financial services.
programs. Traditional methods of distributing welfare Comprehensive education and outreach programs are
can be slow, inefficient, and prone to corruption. CBDCs crucial to ensure that these populations can benefit from
allow for direct transfers of welfare benefits into CBDCs. These programs should not only teach basic
beneficiaries' digital wallets, reducing administrative digital skills but also provide information on security
overhead, cutting down on leakage, and ensuring that aid practices, the benefits of financial inclusion, and the
reaches those who need it promptly and without specific functionalities of CBDCs. Such educational
intermediaries. initiatives require collaboration between governments,
educational institutions, and financial organizations.
Expanding on these sections not only provides
a clearer understanding of the methodology and benefits Regulatory Frameworks:
of CBDCs but also emphasizes their potential role in Establishing a supportive and effective
enhancing financial inclusion by addressing specific regulatory framework for CBDCs is one of the most
challenges faced by the unbanked and underbanked complex challenges. This framework must ensure the
populations safe use of digital currencies, safeguard against financial
crimes, and provide clear guidelines for the management
Challenges of monetary policies. Furthermore, these regulations
Infrastructure Needs: must be flexible enough to allow for innovation and
The effective deployment of CBDCs relies adaptation as the technology and its uses evolve.
heavily on the foundational digital infrastructure of a Additionally, integrating CBDCs into the existing
country. For CBDCs to reach their full potential, there financial legal systems involves reconciling new digital
must be widespread access to the internet and a reliable solutions with traditional financial laws, which may not
electricity supply. In many developing countries, be fully equipped to handle the nuances of digital
however, these resources are not consistently available, currencies. This requires a reevaluation and possibly an
particularly in rural or remote areas. The lack of internet overhaul of existing financial regulations to create a
connectivity and frequent power outages can severely conducive environment for CBDCs to flourish without
limit the accessibility of digital currencies, thus compromising financial stability or consumer protection.
excluding those who may benefit the most from financial
inclusion initiatives. Ensuring that these infrastructure Expanding on these challenges highlights the
challenges are met is essential for the success of CBDCs, multifaceted difficulties that policymakers, financial
necessitating significant investments from both public institutions, and populations must navigate in the
and private sectors to enhance connectivity and power implementation of CBDCs. Addressing these issues is
reliability (Andrion, 2023). essential for ensuring that the deployment of digital
currencies contributes positively to financial inclusion
Privacy Issues: and does not exacerbate existing inequalities (Luu et al.,
While CBDCs can offer improved security 2023).
measures, they also present substantial privacy concerns
that need careful consideration. The ability of central Case Studies
banks to track and monitor digital currency transactions Sweden's e-krona Pilot:
can lead to fears of surveillance and misuse of personal Sweden is often cited as one of the most
financial data. These concerns are not just about cashless societies in the world, making it a fitting
unauthorized access to data but also about how data is environment for testing a national digital currency. The
used by governments and other official bodies. To Swedish central bank, Riksbanken, initiated the e-krona
address these concerns, robust data protection laws need pilot to explore the feasibility of a digital currency that
to be implemented alongside technology solutions that could ensure public access to a safe and efficient means
can secure transactional anonymity while maintaining of payment as the use of physical cash continues to
compliance with regulatory requirements. Balancing the decline. The pilot, which started in 2021, focuses on
need for regulatory oversight with the rights to personal simulating everyday banking activities, including
privacy is a delicate task that requires thoughtful payments, deposits, and withdrawals from digital wallets
legislation and technology design (Andrion, 2023). on mobile phones. One of the key objectives is to
examine how well the e-krona can serve in increasing
financial inclusivity, particularly for remote or
underserved populations who, despite the country's high
© 2024 Scholars Journal of Economics, Business and Management | Published by SAS Publishers, India 167
 Andreas Svoboda, Sch J Econ Bus Manag, May, 2024; 11(5): 165-169
digital penetration, may still face barriers in accessing lower transaction costs and extend financial services into
traditional banking services. The pilot also tests the previously unreachable areas, offering a promising tool
resilience of the system against cyber threats and for economic empowerment.
evaluates its operational stability in various scenarios
(Advisors, 2023). However, the journey toward the successful
implementation of CBDCs is fraught with considerable
China's Digital Yuan Trials: challenges. Key among these are the infrastructural
China's approach to CBDCs, known as the demands—ensuring universal access to reliable internet
Digital Currency Electronic Payment (DCEP), popularly and power supplies, particularly in less developed
referred to as the digital yuan, represents a more regions, remains a formidable barrier. Moreover, privacy
advanced stage of implementation. Unlike Sweden, concerns are paramount, as the potential for increased
which is investigating the potential of digital currency in surveillance and data misuse could undermine trust in
a largely cashless society, China’s motivations also these new financial instruments. Regulatory challenges
include enhancing the efficiency of its retail payment also present a significant hurdle, requiring meticulous
system and reducing systemic risks. The digital yuan has crafting of legal frameworks that balance the need for
been trialed in several cities across China and is designed innovation with the necessity of safeguarding the
to be operational independent of the internet to ensure it financial system and protecting individual rights.
remains accessible to users without reliable digital
connectivity. This feature is particularly relevant for Therefore, policymakers must approach the
financial inclusion, aiming to bridge the gap for those development and deployment of CBDCs with a
currently underserved by traditional banks. Early results measured and cautious strategy. It is essential that these
from these trials indicate that the digital yuan could digital currencies incorporate robust safeguards to
dramatically reduce the cost of financial transactions and mitigate potential risks, such as stringent data protection
improve the speed and reliability of payments. laws and resilient cybersecurity measures. As we look to
the future, ongoing research is critical. Longitudinal
Both case studies underscore the critical aspects studies of existing CBDC pilot projects can provide
of CBDCs in promoting financial inclusion. In Sweden, valuable insights into their long-term effects, offering a
the focus is on integrating digital currency with existing clearer understanding of how digital currencies can best
financial infrastructures to provide universal access, contribute to financial inclusion.
whereas China emphasizes the broad scalability and
operational effectiveness of the digital yuan, ensuring it By addressing these challenges and focusing on
supports a vast user base with varying degrees of continuous improvement through research and pilot
technological access. testing, CBDCs can indeed fulfill their promise as a tool
for financial inclusion, transforming the economic
From these case studies, several insights landscape by bringing more people into the fold of
emerge that can guide other nations considering the formal financial systems. This transformation will not
adoption of CBDCs. Firstly, the importance of tailoring only benefit individuals who gain access to financial
the digital currency system to fit the specific economic, services but also strengthen economic systems by
technological, and social context of the country is increasing the diversity and breadth of economic
evident. Additionally, both examples highlight the need participation.
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