Working Paper #7: Should Central Banks Use Distributed Ledger Technology and Digital Currencies to Advance Financial Inclusion?

May 17, 2021
Michael S. Barr, Adrienne A. Harris, Lev Menand, Karin Thrasher

This brief is part of the Central Bank of the Future Project (“CBOTF”), a research project that seeks to identify ways that central banks across the world can improve access to financial products and services for underserved communities. CBOTF engages with scholars, financial regulators and policy makers, think tanks, financial institutions, fintech companies, consumer and community organizations, and other stakeholders to examine how central banks can evolve to better promote financial inclusion and financial health. CBOTF also works to find ways that businesses and nonprofits can work alongside government sector efforts for financial inclusion. One output is a series of working papers and policy briefs focused on specific topics.

This paper examines how central banks might use distributed ledger technology (“DLT”) to improve access to safe and affordable financial products and services. We consider how central banks might use DLT to advance objectives such as Anti-Money Laundering (“AML”) compliance and discuss both central bank digital currencies (“CBDC”) and private digital currencies. We consider implementation challenges for these new approaches relating to interoperability, privacy, and efficiency. We conclude that financial inclusion is far from an assured outcome: central banks must work to ensure that any new technologies they adopt or foster do not exclude marginalized groups and instead focus with intentionality on low-income households. Moreover, difficult issues with respect to financial disintermediation, credit availability, and financial stability would need to be addressed.

This paper proceeds in four parts. Part II provides a primer on DLT and CBDC. Part III considers four ways central banks might use DLT to advance financial inclusion: to accelerate payments, to improve identity verification, to formalize collateral, and to lower compliance costs. Part IV focuses on DLT in the digital currency context, analyzing non-fiat DLT-based digital currencies and proposals to create DLT and non-DLT central bank digital currencies. Part V concludes.