The idea of a retail CBDC is already being considered in over a hundred nations. According to a Bank for International Settlements (BIS) survey, 93 percent of central banks are looking into central bank digital currencies (CBDCs), and 58 percent believe they may issue a retail CBDC in the future. Bank of Mexico Governor Victoria Rodrguez recently stated that the country can anticipate a retail CBDC by 2025.
How Will the Central Bank’s Digital Currency Work?
The growth of cryptocurrencies and stablecoins in recent years has attracted the attention of many regulatory agencies. To stay up-to-date with technological developments, Central Bank Digital Currencies (CBDCs) have also been proposed to reduce costs and improve the effectiveness of cross-border payments. The CBDC will serve as a store of value and a means of payment as it will be a fundamental component of the monetary base and have the same characteristics as coins and notes. This development is an important indicator for traders who engage in forex and CFD trading, as integrating a digital currency into existing payment rails could improve the economy drastically. Banxico has indicated that distributed ledger technology (DLT) would not be employed in creating the CBDC, confirming that it will not function like digital assets like Bitcoin or Ethereum.
The central bank has already set aside 10.22 million pesos to develop the CBDC. The bank defends this gradual pace but recognizes the need to keep up with technological advancements in the financial system. The central bank also stated that the CBDC’s goal is to “expand the range of payment in the economy” in a Payment Strategy paper.
The Digital Currency’s Potential Impact on Mexico
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1.4 billion individuals do not have access to the official financial system globally. Financial inclusion is one of the main policy goals that central banks (especially in developing and low-income nations) are considering for retail CBDC. Financial inclusion is among the top three reasons for issuing CBDCs in almost 60% of developing and low-income countries.
Since most financially excluded families only accept monetary payments, they are not included in the official economy.
CBDCs can become accepted as a digital payment method by those who are financially excluded if they are appropriately designed to overcome the obstacles to financial inclusion. As “digital cash,” they may be made to mimic some of the advantageous characteristics of cash, for example, by enabling usage without the need for a bank account. Like cash, CBDC might be used for short transactions with little to no associated costs and less strict identification criteria for low-risk groups who have trouble getting official identity documents. It is also possible to create CBDCs that function in offline settings. From the standpoint of credit risk, a CBDC may be just as reliable and risk-free as actual currency as it is a direct responsibility of the central bank.
Once adopted by the financially excluded, central bank digital currencies could serve as a gateway to broader formal financial systems. However, the financially excluded are often digitally excluded — a significant obstacle. CBDC use requires basic digital literacy and access tools like phones. It seems Banxico has already considered this. According to Elsoldemexico, Banxico’s CBDC development has three stages:
- Banxico will build a platform to enable transactions using ID numbers or cell phones.
- Financial institutions will help develop a system interoperable with the SPEI payment network.
- Banxico launches the CBDC publicly.
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Improving digital infrastructure, connectivity in remote regions, and digital literacy should complement CBDC rollouts. Digital ID systems could also streamline onboarding.
More inclusive finance can strengthen stability and monetary policy transmission. Broader deposit bases foster financial stability, while inclusion enables poverty alleviation and economic growth.
For businesses in Mexico, it opens doors to a wider range of customers and markets. Companies can adapt to accept virtual money, attracting both local and international clientele. This expansion of payment options could increase regional trade and economic activity.
Challenges
Commercial banks in Mexico are concerned about developing a CBDC since their account holders’ savings could be hurt in the event of a bank run. The concern expressed is that if Banco de México issues a CBDC, customers of commercial banks may shift some or all of their deposits out of those banks and into CBDC accounts with the central bank. This could spark bank runs that severely impact the liquidity of Mexican commercial banks. However, even if Banco de México issues a central bank digital currency, commercial banks would still play important roles in the financial system. Specifically, they could charge fees for transfers made using the CBDC, including foreign currency transfers over systems like SWIFT. So they could generate revenue from CBDC-based transactions. They could also apply currency exchange spreads when converting the CBDC from one currency to another. For example, when converting from Mexican pesos to US dollars. This spread is the difference between the buy and sell rates they offer, allowing them to make money on currency exchanges.
As a result, putting the CBDC into effect will alter account management and may reduce the number of transactions financial institutions do with foreign users. The Banco de Mexico also needs to take care of the matter of exchanging CBDCs for cash or other currencies. Rather than focusing on the location of CBDC storage, it’s essential to examine the ownership model that will be used and if a digital wallet will be made.
Banxico faces a hurdle in completing the project given the issues of bank disintermediation and financial instability since a sizable portion of the Mexican populace requires access to banking or financial goods.
The future of payment networks like CODI and SPEI is still being determined. Nonetheless, because CODI and SPEI are Mexico’s two main payment systems, the populace still employs their services to conduct transactions that Banxico oversees.
Ensuring Secure and Responsible Use of the Digital Currency in Mexico
While the digital currency brings promise, it also presents challenges. Education and awareness campaigns will be vital to ensure residents and businesses in Mexico understand how to use this currency securely. Additionally, concerns about privacy and data protection need to be addressed. Once there are structures in place to ensure safety for all users, it will likely become even more popular.
