Central Bank Digital Currency, Poverty Reduction and the United Nations Sustainable Development Goals

Central Bank Digital Currency, Poverty Reduction and the United Nations Sustainable Development Goals

DOI: 10.4018/978-1-6684-6732-9.ch011
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Abstract

This chapter examines the role of central bank digital currency for poverty reduction and sustainable development. In the chapter, the author argues that a CBDC can eliminate poverty by first increasing financial inclusion which then gives poor people access to affordable credit and other basic financial services which they can use to improve their welfare, thereby enabling them to rise above poverty. This argument is valid only if a central bank digital currency is specially designed to incorporate features that increase financial inclusion for poor banked and unbanked adults. The argument may not apply to cases where a CBDC is not designed to increase financial inclusion as is the case in developed countries.
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Introduction

The objective of this paper is to discuss how central bank digital currency (CBDC) can help to reduce the level of poverty towards the attainment of the United Nations sustainable development goals (SDGs). This topic is important to policymakers who are interested in poverty reduction mechanisms. This study is also relevant to researchers conducting research on how to reduce the level of poverty towards the realization of the sustainable development goals.

CBDC is a recent financial innovation in the payment system. Prior to the introduction of CBDCs, several studies in the financial innovation literature show that financial innovations such as Fintech can contribute to poverty reduction in many societies (Ajide, 2016; Hulme et al 1997; Michael et al, 2022). Other studies emphasize the risk of financial innovation and its implications for development (e.g. Allen and Gale, 1994; Ozili, 2022e). Although existing studies show that financial innovation plays an important role for poverty reduction, the literature has not examined the relationship between CBDC, poverty reduction and sustainable development. This relationship is important because it can provide new insights about how digital innovations can support the realization of the United Nations sustainable development goals (SDGs). In this paper, it was argued that CBDC may be linked to poverty reduction towards greater sustainable development.

Poverty reduction or poverty elimination is the first goal among the 17 UN SDGs. Poverty is commonly defined as the number of people living below the poverty line (see, for example, Wratten, 1995; Tilak, 2002). Poverty is multidimensional; in the sense that, insufficient income or lack of any income can lead to deterioration in health, education and welfare of poor people. For this reason, the United Nations is spearheading efforts to reduce poverty in countries in the global south particularly in developing countries.

Several innovations are emerging that contribute to efforts aimed at reducing the level of poverty. Some of these innovations include digital financial services, the microfinance agenda, blended poverty financing, aid allocation among others. In the academic literature, a number of studies have examined how innovations can help to reduce the level of poverty (e.g. Johnson and Rogaly, 1997; Kelikume, 2021; Yonah and Salim, 2008; Collier and Dollar, 2002). These studies show that, with the right pre-conditions in place, digital financial services and microfinance schemes can reduce poverty to some extent. Another emerging innovation in the economic system is central bank digital currency.

A central bank digital currency is money or currency in digital form (Ekong and Ekong, 2022). Interest in CBDC is growing rapidly among policy makers and central banks around the world. The economic benefits of a central bank digital currency are enormous. They include the effective conduct of monetary policy, the reduction in cash management cost, increase in foreign remittance, low-cost transactions, increase in the level of financial inclusion, improved payment efficiency, increase in tax revenue from the digital economy, and facilitating the growth of the digital economy. (see, for example, Bordo and Levin, 2017; Ozili, 2022a; Engert and Fung, 2017; Ozili, 2022b).

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