Introduction
Financial Stability and CBDCs Impact on Emerging Economies ; The rise of Central Bank Digital Currencies (CBDCs) is transforming the global financial landscape. As of 2025, over 100 countries are actively researching, developing, or piloting CBDCs. While developed economies are leading in technological infrastructure, emerging economies are showing growing interest in CBDCs due to their potential to improve financial inclusion, reduce transaction costs, and enhance monetary policy effectiveness.
But one crucial question remains: What are the financial stability implications of CBDC adoption in emerging economies? This article explores the potential risks and opportunities associated with CBDCs and offers insights into how policymakers can manage the transition.
What Are CBDCs?
Financial Stability and CBDCs Impact on Emerging Economies ; Central Bank Digital Currencies (CBDCs) are digital forms of sovereign currency issued and regulated by a country’s central bank. Unlike decentralized cryptocurrencies such as Bitcoin or Ethereum, which are privately issued and operate on permission less blockchain networks, CBDCs are state-backed, centrally controlled, and designed to function as legal tender (Auer & Böhme, 2020).
CBDCs can be categorized into two types:
Retail CBDCs, which are intended for general public use, enabling individuals and businesses to make payments and store value digitally.
Wholesale CBDCs, which are designed for use by financial institutions for interbank settlements and large-scale transactions.
CBDCs are not just digitized cash they are a new form of central bank liability with the potential to reshape how monetary systems operate. They promise benefits like enhanced payment efficiency, improved monetary policy transmission, and a reduction in the reliance on cash, particularly in economies where cash handling is expensive and inefficient (Bank for International Settlements [BIS], 2021).
Why Emerging Economies Are Considering CBDCs
Financial Stability and CBDCs Impact on Emerging Economies ; Emerging economies often face a unique set of financial and infrastructural challenges, including large unbanked populations, inefficient payment systems, high remittance costs, and limited access to formal credit. CBDCs are increasingly seen as tools to address these issues and promote inclusive economic development (Kosse & Mattei, 2022).
1. Promoting Financial Inclusion
Financial Stability and CBDCs Impact on Emerging Economies ;Many emerging markets have significant portions of their populations without access to traditional banking services. CBDCs, especially when integrated with mobile technologies, can provide a safe, accessible, and low-cost alternative to banking services (Arner et al., 2020). For instance, a digital wallet linked to a CBDC system could allow individuals without a bank account to store and transfer money securely.
2. Lowering Transaction and Remittance Costs
Cross-border remittances are a vital source of income for many households in emerging economies but are often accompanied by high transaction fees and delays. CBDCs, especially when interoperable with other countries’ digital currencies, could reduce intermediaries, thereby lowering costs and increasing the speed and security of remittance transfers (International Monetary Fund [IMF], 2021).
3. Improving Transparency and Reducing CorruptionAccounting and Financial Information Principles and Standards
CBDCs offer enhanced traceability of transactions, which can be a powerful tool in combatting corruption, money laundering, and illicit financial flows. With proper safeguards for privacy, governments can monitor digital currency flows to ensure that public funds are used appropriately, and tax compliance is improved (Zhang & Li, 2021).
4. Enhancing Monetary Policy Transmission
In economies where cash is dominant and banking infrastructure is underdeveloped, monetary policy tools may be less effective. CBDCs enable direct transmission of monetary policy, such as through programmable payments or variable interest rates on digital wallets. This creates new channels for central banks to stimulate or contract economic activity (BIS, 2021).
Financial Stability and CBDCs Impact on Emerging Economies: Opportunities from CBDCs
Financial Stability and CBDCs Impact on Emerging Economies particularly by strengthening domestic financial systems and increasing monetary policy effectiveness. Key benefits include:
1. Resilience of Payment Systems
CBDCs can improve the resilience of national payment infrastructures by reducing reliance on private payment networks and foreign-dominated financial systems. Many emerging economies depend heavily on international networks such as SWIFT or multinational card providers, which can become points of vulnerability in times of geopolitical tension or economic crisis (Kosse & Mattei, 2022). A CBDC offers a state-controlled digital infrastructure, ensuring greater continuity and control during systemic shocks.
2. Efficient Monetary Policy Transmission
In low-banking-penetration environments, the transmission of monetary policy tools like interest rate changes often becomes delayed or ineffective. CBDCs can allow central banks to implement real-time monetary adjustments, such as programmable interest rates or time-bound stimulus payments directly to wallets, bypassing inefficient intermediaries (Auer et al., 2021). This strengthens a central bank’s ability to stabilize inflation, unemployment, and economic growth.
3. Reduced Currency Substitution and Dollarization
Emerging economies often face the issue of currency substitution, where residents prefer to hold foreign currencies (typically USD) due to distrust in local monetary policy or high inflation. CBDCs can increase confidence in local currency by offering a digital alternative that is both safe and easily accessible. This may reduce dollarization and support exchange rate stability (IMF, 2021).
Financial Stability Risks of CBDC Adoption
Despite their potential, CBDCs introduce complex risks that could undermine financial stability if poorly managed or hastily implemented.
1. Disintermediation of Banks
Financial Stability and CBDCs Impact on Emerging Economies. A major concern is the risk of bank disintermediation—where individuals shift deposits from commercial banks into CBDC wallets, especially during periods of uncertainty. Since banks rely on these deposits for lending and liquidity, a significant outflow could undermine their ability to provide credit, leading to contraction in economic activity (Carstens, 2021). Designing CBDCs with limits, tiered interest rates, or non-interest-bearing features can help mitigate this risk.
2. Operational and Cybersecurity Risks
Implementing a nationwide digital currency demands robust technological infrastructure and cybersecurity frameworks. Many emerging economies may lack the resources or capacity to defend against cyberattacks, system failures, or data breaches. A compromised CBDC system could erode public trust and trigger financial panic (Khiaonarong & Humphrey, 2022).
3. Capital Flight and Exchange Rate Volatility
If CBDCs are interoperable across borders or not properly controlled, they could lead to fast and large-scale capital movements, especially during financial crises. This may result in sudden depreciation of local currencies, increase exchange rate volatility, and strain foreign reserves (Boar & Wehrli, 2021). Therefore, capital flow management tools and cross-border cooperation are critical in CBDC design.
4. Exclusion of Vulnerable Groups
Although CBDCs are often promoted for financial inclusion, digital divides can lead to further exclusion. In regions with low digital literacy, lack of smartphone access, or unreliable internet, marginalized groups may find it difficult to use CBDC systems (Zhang & Li, 2021). Inclusive design must therefore consider offline functionality, user-friendly interfaces, and educational outreach.
Policy Recommendations
To effectively balance the opportunities and risks of Central Bank Digital Currency (CBDC) adoption, emerging economies must approach implementation strategically. The following policy recommendations offer a roadmap for responsible CBDC development and deployment:
Tiered Remuneration Models
Central banks should implement tiered interest rate structures or impose holding limits to discourage users from transferring excessive funds from commercial banks into CBDC wallets. This reduces the risk of bank disintermediation, which could destabilize credit markets and liquidity provision (Carstens, 2021).
Robust Legal and Regulatory Frameworks
A successful CBDC ecosystem requires clear legal definitions regarding the status of digital currency, along with comprehensive regulations to ensure data privacy, cybersecurity, and AML/CTF (Counter-Terrorism Financing) compliance (IMF, 2021). Regulations must also address consumer protection, interoperability, and liability in the event of technical failures.
Public-Private Partnerships (PPPs)
Digital infrastructure gaps are a major barrier in many emerging markets. Governments should engage in PPPs with fintech firms, telecom providers, and financial institutions to expand access to internet connectivity, mobile payment solutions, and digital ID systems (Kosse & Mattei, 2022). Collaboration with trusted private-sector actors can also accelerate innovation and build public trust.
Gradual Rollout and Pilot Programs
CBDCs should be introduced in phases, beginning with small-scale pilot programs to test usability, security, and user behavior in real-time. Feedback from these pilots can guide technical adjustments and policy refinements before full-scale national deployment (Boar & Wehrli, 2021).
International Coordination
Given the global implications of digital currencies, international coordination is essential. Emerging economies should work with institutions like the IMF, World Bank, and BIS, and engage in bilateral or regional agreements to promote interoperability, prevent regulatory arbitrage, and manage cross-border capital flows (Auer et al., 2021).
Case Study: Nigeria’s eNaira
Background
Financial Stability and CBDCs Impact on Emerging Economies. In October 2021, Nigeria became the first African country to officially launch a retail CBDC, the eNaira, issued by the Central Bank of Nigeria (CBN). The launch aimed to promote financial inclusion, reduce the cost of financial transactions, and enhance the efficiency of cross-border payments.
Key Observations
- Cross-Border Remittance Potential
The eNaira showed early promise in reducing the cost and time of remittances, a critical issue for Nigeria, where diaspora remittances account for a significant share of GDP (CBN, 2022). By streamlining remittance channels and bypassing intermediaries, the eNaira offered a more efficient alternative to traditional methods. - Adoption Challenges: Trust and Awareness
Despite its potential, user adoption remained low in the initial months. Many citizens lacked trust in government-led digital initiatives, particularly in a context of political instability and past financial mismanagement (IMF, 2022). Moreover, limited public awareness campaigns and lack of clarity about its use hindered widespread uptake. - Banking Sector Resistance
Commercial banks were initially skeptical of the eNaira, concerned about potential disintermediation and the loss of deposit-based revenue streams. Some banks delayed promoting or integrating the eNaira into their platforms, slowing momentum during critical early phases (Khiaonarong & Humphrey, 2022).
Lessons Learned
Nigeria’s experience underscores several important lessons for other emerging economies:
- Public education and trust-building are essential. CBDC success depends on clear communication, financial literacy campaigns, and demonstration of security and benefits.
- Incentivizing early adoption, such as offering transaction fee waivers or small-value eNaira transfers, could boost uptake.
- Institutional cooperation is crucial, especially with commercial banks, to avoid resistance and encourage ecosystem-wide integration.
Conclusion
Central Bank Digital Currencies (CBDCs) represent a transformative opportunity for emerging economies striving to modernize their financial systems. By enhancing payment system resilience, monetary policy effectiveness, and financial inclusion, CBDCs could serve as powerful tools for economic development and stability. However, these benefits are not automatic.
To realize the full potential of CBDCs, financial stability must remain a top policy priority. This requires a thoughtful approach to design—one that prevents bank disintermediation, protects user privacy, and supports the broader monetary ecosystem. Phased implementation, through controlled pilots and real-world testing, will help policymakers adapt strategies based on real-time feedback and evolving risks.
Moreover, strong institutional coordination both domestically and internationally is essential to manage cross-border implications, ensure interoperability, and build trust among stakeholders.
If done right, CBDCs can be a game-changer for emerging markets—unlocking new levels of resilience, inclusivity, and efficiency in financial systems that are often constrained by legacy infrastructure and informal economies.
Frequently Asked Questions (FAQs)
Q1: Are CBDCs the same as cryptocurrencies?
No. CBDCs are backed by central banks and are legal tender, unlike decentralized and often volatile cryptocurrencies like Bitcoin.
Q2: Can CBDCs help reduce corruption?
Yes. CBDCs offer traceable digital transactions, improving transparency in public spending and reducing opportunities for fraud.
Q3: Do CBDCs replace cash?
Not necessarily. Most central banks plan to offer CBDCs alongside physical cash, at least during early stages.
Reference
Auer, R., Cornelli, G., & Frost, J. (2021). CBDCs: Motives, economic implications, and the research frontier. BIS Working Papers No. 976.
https://www.bis.org/publ/work976.htm
Boar, C., & Wehrli, A. (2021). Ready, steady, go? – Results of the third BIS survey on central bank digital currency. BIS Papers No. 114. https://www.bis.org/publ/bppdf/bispap114.pdf
Carstens, A. (2021). Central bank digital currencies: Putting a big idea into practice. Bank for International Settlements. https://www.bis.org/speeches/sp210127.htm
Central Bank of Nigeria. (2022). eNaira progress update.https://www.cbn.gov.ng
IMF. (2021). The rise of public and private digital money. https://www.imf.org/en/Publications/fintech-notes/Issues/2021/07/29/The-Rise-of-Public-and-Private-Digital-Money-462640
IMF. (2022). Nigeria: 2022 Article IV Consultation – Staff Report.https://www.imf.org
Khiaonarong, T., & Humphrey, D. (2022). Cyber risk and central banking. IMF Working Paper WP/22/20. https://www.imf.org/en/Publications/WP/Issues/2022/01/21/Cyber-Risk-and-Central-Banking-512208
Kosse, A., & Mattei, I. (2022). Gaining momentum – Results of the 2021 BIS survey on CBDCs. BIS Papers No. 125. https://www.bis.org/publ/bppdf/bispap125.htm