One of the potential benefits of central bank digitalcurrencies CBDCs is that they could help countries improve their institutional quality byincreasing transparency and accountability i
THEORETICAL BACKGROUND AND EMPIRICAL LITERATURE -c cs-ccsecrx 5
Theoretical framework eseeessesseesseesssecseesseecseesseecseesseesaeesseesseesseesaeesseesseesseessessseesaeeneeneeaeeeaeeensees 5 1 The current state of CDBC adoption in the WOrId .ssesssesssesssesssecssesssecseesssesseesseesseeees 5
2.1.1 The current state of CDBC adoption in the world
Central Bank Digital Currency (CBDC) is a digital cash form issued by a nation's central bank, fully backed by it The Bank of England defines CBDC as electronic central bank money that offers broader access than reserves, enhanced functionality for retail transactions compared to cash, a distinct operational structure from other central bank money, and the potential to earn interest at rates differing from reserve rates CBDCs aim to enhance efficiency, foster competition, provide a stable and regulated digital currency, and lessen reliance on foreign currencies.
As of March 2022, 87 countries are exploring the issuance of Central Bank Digital Currencies (CBDCs), a significant increase from 35 countries in May 2020, according to the Atlantic Council CBDCs have gained prominence in discussions surrounding the global financial system, with a 2020 survey by the Bank for International Settlements (BIS) indicating that over 80% of central banks are involved in CBDC initiatives, and approximately 40% are actively developing them The primary motivations driving the development of CBDCs include enhancing payment system efficiency, promoting financial inclusion, and preserving monetary sovereignty.
Central Bank Digital Currencies (CBDCs) are gaining significant attention from policymakers and researchers due to their potential impact on economic and financial stability, both domestically and internationally (BIS, 2021; IMF, 2023) A 2020 survey by the Bank for International Settlements revealed that many central banks are exploring CBDCs to enhance payment efficiency, promote financial inclusion, strengthen monetary sovereignty, and foster innovation (Boar et al., 2020) Notably, countries like China, the Bahamas, Jamaica, Sweden, Uruguay, and Cambodia are advancing towards launching or piloting their digital currencies (Atlantic Council, 2022) These nations anticipate that CBDCs will enhance institutional quality by improving governance, rule of law, and reducing corruption Furthermore, CBDCs are expected to influence financial stability, monetary policy transmission, international spillovers, and digital sovereignty (Adrian, 2019; BIS, 2018; IMF, 2018).
International CBDC initiatives, alongside domestic projects, are gaining traction, with notable efforts like the CBDC dictionary This initiative seeks to establish a standardized language and definitions for Central Bank Digital Currencies (CBDCs), fostering clarity and collaboration among participating countries.
In 2021, the Multiple CBDC (mCBDC) Bridge, a collaborative initiative between the Hong Kong Monetary Authority and the Bank of Thailand, was launched to enhance cross-border payments using Central Bank Digital Currencies (CBDCs) These international CBDC projects aim to improve institutional quality by increasing payment efficiency, reducing settlement risks, and promoting financial inclusion while fostering global cooperation for financial stability However, challenges such as interoperability, governance, and varying legal frameworks across jurisdictions must be addressed for successful implementation Another notable initiative is the Dunbar Project, spearheaded by the BIS Innovation Hub alongside the Reserve Bank of Australia, Central Bank of Malaysia, Monetary Authority of Singapore, and South African Reserve Bank This project developed prototypes for a shared platform to enable direct cross-border transactions between financial institutions, potentially reducing costs and enhancing transaction speed.
The implementation of a multi-CBDC platform across central banks faces six key challenges, as identified by the BIS Innovation Hub (2022) To address these challenges, the IMF offers technical assistance and policy guidance to its member countries, focusing on essential aspects of CBDC design and implementation, including legal frameworks, governance, operational models, technology selection, risk management, and international collaboration The IMF promotes peer learning and knowledge exchange among central banks through various formats such as workshops, seminars, and publications, responding to requests for CBDC capacity development from over 40 countries (IMF, 2023) By improving institutional quality, central banks can build trust in their CBDCs, effectively manage risks, and harness the advantages of digital innovation.
2.1.2 The current state of Institutional Quality in the world
The World Bank's "Worldwide Governance Indicators" report, covering over 200 countries from 1996 to 2021, evaluates governance across six dimensions: voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption Institutional quality, crucial for economic development and social welfare, varies by country due to factors like history, culture, and politics Notable improvements in institutional quality have been observed in countries such as Estonia, Rwanda, Georgia, and Chile, which have enacted governance reforms The latest WGI report, released in September 2022, highlights significant variations in governance performance globally, revealing both advancements and setbacks in institutional quality over the past decade, particularly in the area of Voice and Accountability.
Since 2010, the average freedom of expression, association, and media has shown slight improvement across various countries, though significant regional and national disparities remain While nations like Myanmar, Venezuela, and Belarus have faced considerable declines, countries such as Tunisia, Armenia, and Sudan have made notable strides in enhancing these freedoms The report emphasizes the ongoing challenges and potential opportunities for improving governance, particularly in light of the COVID-19 pandemic.
The COVID-19 pandemic has significantly challenged public health, economic stability, and social cohesion It highlights the critical role of effective governance in managing crises, delivering public services, ensuring accountability, and safeguarding human rights However, the pandemic has also provided some governments with opportunities to erode democratic institutions, limit civic freedoms, and diminish checks and balances.
Since 2010, Political Stability and the Absence of Violence/Terrorism have seen slight improvements globally, though significant disparities exist among regions Countries like Syria, Yemen, and Libya have faced severe civil wars, undermining their political stability, while nations such as Colombia, Sri Lanka, and Nepal have made strides in resolving internal conflicts Meanwhile, Government Effectiveness has remained stable on average, but some regions have experienced declines Nations like Brazil, South Africa, and Malaysia have struggled with government effectiveness due to political scandals and economic crises, which have diminished public trust in their institutions.
2.2.1 The factors affacting the adoption of CDBC
A 2020 survey by the Bank for International Settlements (BIS) identified key social factors influencing the demand for Central Bank Digital Currencies (CBDCs), including trust, convenience, privacy, and financial inclusion The findings revealed that individuals who have confidence in their central bank are more likely to support the adoption of CBDCs.
Individuals who prioritize convenience are more inclined to adopt Central Bank Digital Currencies (CBDCs) compared to those who prefer traditional cash or alternative payment methods Privacy concerns significantly impact the demand for CBDCs, as users have varying expectations for the security of their personal and transaction information Additionally, financial inclusion plays a crucial role in CBDC adoption, as these digital currencies can potentially provide unbanked and underbanked populations with access to essential digital financial services.
Luu et al (2022) investigate how cultural values influence the adoption of central bank digital currency (CBDC), utilizing Hofstede's cultural dimensions theory Their findings indicate that individualism and uncertainty avoidance positively impact the intention to use CBDCs, while power distance negatively affects it Policymakers are urged to consider cultural values when developing CBDC policies Novi et al (2022) emphasize the importance of making CBDCs user-friendly and efficient to enhance adoption rates, while acknowledging challenges such as the need for infrastructure investment and potential disruptions to existing financial systems They also discuss the implications of CBDCs on monetary policy, including effects on interest rates and financial stability Ngo et al (2023) highlight that good governance practices, such as transparency and citizen engagement, can foster public trust and acceptance of CBDCs, alongside monetary policy factors like stability and convenience.
A study by Bijlsma et al (2021) identified four key dimensions influencing the adoption of central bank digital currencies (CBDCs): technology, user characteristics, economic and financial environment, and institutional environment They highlighted trust as a vital factor for CBDC adoption, stressing the necessity for reliable and secure technology Additionally, they recommended that central banks design CBDCs tailored to user needs and preferences In a related study, C Casanueva et al (2021) examined economic factors driving CBDC adoption, finding that transaction costs, payment speed, and access to financial services are significant motivators They noted that CBDCs could enhance financial inclusion for underbanked populations, while also warning of potential challenges, including the need for substantial infrastructure investment and the risk of disrupting existing financial systems.
2.2.2 Institutional Quality and their impact on the socioeconomic and environment
Institutional quality plays a crucial role in promoting financial inclusion, which refers to the access and utilization of formal financial services by individuals and businesses This inclusivity can drive economic growth, alleviate poverty, and enhance social cohesion However, the effectiveness of financial services is significantly influenced by the institutional environment, including robust legal frameworks, effective supervision, transparency, and consumer protection, which build trust in the financial system (Demirguc-Kunt et al., 2018) A study by Evan (2021) utilizing a system GMM model on panel data from 33 African countries highlights the low and varied levels of digital financial inclusion across the continent, revealing that social and institutional factors such as income, education, mobile phone penetration, gender inequality, corruption, political stability, and financial sector development play significant roles The findings suggest that policymakers should focus on enhancing financial literacy, reducing corruption, promoting political stability, and strengthening the financial sector to improve digital financial inclusion in Africa.
Model development and sample sel@CtẽOI -ssccxecsrxerrrxetrrrrrtrtrrrrrrrrrkkrrke 15 3.3 Research variables esssesssssscssesssessessssssseessesssesssessseessessseeassesseesueessesseesseessteeneeateeseessseensenseesseenes 16
To examine the impacts of economic factors on CBDC adoption, we use the following regression model:
CDBCit = 6o + BiINQit+ 842Controlsitit + Fixed Effect + cit (1)
The dependent variable, CDBCit, reflects the level of Central Bank Digital Currency (CBDC) adoption in country i at year t, with robust standard errors considered Institutional factors (INQ), which encompass political stability, absence of violence, control of corruption, rule of law, regulatory quality, and government effectiveness, play a crucial role in this model Detailed descriptions of the INQ variables utilized in the study can be found in Table 3.3.2 below.
In our model, we include various control variables that could influence the adoption of Central Bank Digital Currencies (CBDCs) across different countries Drawing on existing literature regarding the economic factors impacting blockchain adoption and Bitcoin usage, we suggest that elements like GDP play a significant role in determining the level of CBDC adoption Detailed descriptions of these control variables are provided in Table 3.3.4.
Measuring the adoption of Central Bank Digital Currency (CBDC) is essential for understanding how institutional quality affects its uptake This adoption is influenced by various factors, including technological infrastructure, regulatory frameworks, and public demand Researchers have created several indices, such as the CBDC Index by the Bank for International Settlements (BIS), which evaluates countries' readiness to implement CBDCs based on these factors Additionally, the Digital Currency Global Adoption Index by Chainalysis ranks countries by their cryptocurrency adoption levels, including CBDC These indices offer valuable insights into the state of CBDC adoption, guiding policymakers and central banks on its potential benefits and risks However, research exploring the connection between institutional quality and CBDC adoption as measured by these indices remains limited.
The CBDC Project Index (CBDCPI), introduced by Auer et al (2020), Luu et al (2022), and Ngo et al (2023), serves as a metric to evaluate a central bank's advancement in developing retail or wholesale Central Bank Digital Currencies (CBDCs) These researchers utilized dummy variables to indicate the level of CBDC adoption across various countries By analyzing data from the CBDC tracker and synthesizing findings from earlier studies, the authors categorize the stage of CBDC adoption for each country within a specific year, using a scale from 0 to 4 This classification effectively divides countries into four distinct groups based on their CBDC progress.
Research on Central Bank Digital Currencies (CBDCs) is advancing through various stages, including proof of concept and pilot projects However, there remains a critical need for further research to establish standardized metrics for measuring CBDC adoption This development could enable effective cross-country comparisons and deepen our understanding of the overall impact of digital currencies on the economy.
Measuring institutional quality is a complex task, and there are multiple dimensions and indicators to consider Scholars have used various indicators, such as rule
Measuring institutional quality involves various indicators such as law, property rights, corruption, political stability, government effectiveness, regulatory quality, and democracy (Samadi and Alipourian, 2021) These metrics highlight the strength and consistency of institutions across countries (SpringerLink, 2021) However, there is no universal agreement on the most effective index, as each has its own limitations and biases Consequently, caution is necessary when interpreting empirical studies based on these indicators Researchers typically utilize data from multiple sources, including the Economic Freedom Index (EFI), International Country Risk Guide (ICRG), Global Competitiveness Index (GCI), and World Governance Index (WGI) for a comprehensive assessment (Amighini et al., 2013; Buchanan et al., 2012; Yang et al., 2018).
The Worldwide Governance Indicators (WGI) is the leading measure of institutional quality, recognized for its comprehensive assessment and representative sampling Higher indicator values reflect superior institutional quality, with the first-order principal components of six key indicators used to gauge this quality due to their strong covariance The WGI analyzes the institutional environments of 200 countries and regions, drawing from over 30 data sources across five dimensions: Voice and Accountability, Political Stability No Violence, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption This multifaceted approach enables the identification of institutional quality factors that influence the adoption of Central Bank Digital Currencies (CBDCs).
Factor 6: Political Stability No Violence
These are 3 factors that have been studied by authors such as
The independent variables are measured as follows:
Notation Independent variables ranges from approximately -2.5 (weak)
Control of Corruption to 2.5 (strong) governance performance
Political Stability No to 2.5 (strong) governance performance Violence
3.3.3 Hypothesis - Institutional factors that influence the adoption of CDBC by a country
The adoption of Central Bank Digital Currencies (CBDCs) is an evolving topic, with limited research on how institutional quality influences this process High institutional quality can enhance the design and implementation of CBDCs by ensuring central bank independence and credibility, which are crucial for maintaining monetary policy autonomy and price stability In contrast, political interference or fiscal dominance can hinder a central bank's ability to issue effective CBDCs Additionally, a robust legal framework and enforcement capacity from the government can safeguard user privacy and security in CBDC implementation Conversely, a lack of these capabilities or ulterior motives within the government may lead to risks and potential abuses associated with CBDCs.
Corruption poses a significant threat to the integrity and efficiency of the financial system, facilitating illicit activities like money laundering and tax evasion Central Bank Digital Currencies (CBDCs) can enhance the transparency and accountability of monetary transactions, thereby reducing corruption risks through improved transaction traceability and identity verification (IMF, 2022) Additionally, CBDCs promote financial inclusion and access to digital services, diminishing dependence on informal and unregulated channels that are often susceptible to corrupt practices (Bank of England, 2021).
Corruption significantly hinders the adoption of Central Bank Digital Currencies (CBDCs) by eroding trust in governments and financial institutions, which are essential for CBDC implementation (Mohsin & Rashid, 2021) Countries with higher corruption levels are less likely to adopt CBDCs due to weaker legal frameworks and institutional capacities (Zhang et al., 2021) Additionally, corruption negatively affects the use of digital payments, a key element in CBDC adoption, as it undermines the reliability and security of these systems, deterring consumer participation (Fungášová et al., 2020) Therefore, controlling corruption emerges as a crucial factor in promoting CBDC adoption, necessitating that governments and financial institutions address corruption to foster trust and create a favorable environment for CBDC initiatives This leads to the hypothesis that the control of corruption directly impacts CBDC adoption.
H1: CC is positively associated with CBDC adoption
The Government Effectiveness indicator measures a government's capability to formulate and implement policies that foster private sector growth (Ngo et al., 2023) Research by Stavroulakis et al (2021) indicates that effective government management of the economy and public services significantly impacts citizens' acceptance of Central Bank Digital Currencies (CBDCs) Trust in government enhances citizens' willingness to adopt CBDCs, which are digital tokens regulated by central banks Furthermore, Ahmed et al (2020) highlight that government effectiveness is crucial for the successful implementation of CBDCs, emphasizing the importance of robust policy enforcement and infrastructure maintenance.
Government support and regulatory clarity play a crucial role in the adoption of Central Bank Digital Currencies (CBDCs), as highlighted by Bửhme et al (2020) A supportive regulatory framework can mitigate uncertainties and risks, making CBDCs more attractive to individuals and businesses The relationship between CBDC adoption and "Government Effectiveness" is complex; higher effectiveness can foster positive public perception and trust in the central bank's ability to successfully implement a digital currency (Ngo et al., 2023) Conversely, low government effectiveness may drive the demand for CBDCs as alternatives to unreliable payment systems or to combat financial oppression (Auer et al., 2020) Analysis of online discussions across 175 countries from 2010 to 2020 reveals that nations with greater government effectiveness are more likely to view CBDCs favorably, associating them with enhanced financial inclusion, transparency, and innovation.
The impact of "Government Effectiveness" on the adoption of Central Bank Digital Currencies (CBDCs) can vary based on the CBDC's type and design, including whether it is retail or wholesale, account-based or token-based, and centralized or decentralized.
Research indicates that the quality of public institutions and services, particularly government effectiveness, significantly influences the adoption of retail Central Bank Digital Currencies (CBDCs) across different countries In emerging economies, increased government effectiveness correlates with higher retail CBDC usage, highlighting their potential to improve governance and transparency Conversely, in advanced economies, greater government effectiveness appears to decrease retail CBDC adoption, suggesting resistance from established institutions Therefore, it can be hypothesized that government effectiveness impacts CBDC adoption.
H2: GE is positively associated with CBDC adoption
The Political Stability No Violence (PV) indicator assesses how well a government is perceived to create and enforce policies that foster private sector growth (World Bank, 2021) In discussions about institutional quality, political stability and the absence of violence are frequently highlighted as critical factors.
“governance” or “institutional effectiveness” (Maryaningsih et al, 2022) The link between CBDC adoption and political stability and absence of violence can be analyzed
Compare with hypOtẽeSèS ss-ccthththHHnHhHHH nh grrrgrg 29 5 e9 31 REFERENCES: cá SH HH TH Hà TH Hà HH THẾ Hà HH HH HH HH HH HH HH 33
The validation results in Table 4.4 indicate that five out of the six proposed hypotheses from part 2 of the study are supported, while Hypothesis H5 is not These findings reaffirm the positive correlation between institutional quality factors and the adoption of Central Bank Digital Currencies (CBDCs).
Table 4.4: The validation results of the hypotheses
Control of Corruption has a positive impact on CDBC H1 Supported adoption
The Goverment Effectiveness has a positive impact on H2 Supported
Political Stability No Violence has a _ positive H3 Supported impaction on CDBC adoption
GDP per capita has a negative impact on CDBC H4 Supported adoption H5 Inflation rate has no impact on CDBC adoption Not Supported
Population Growth a positive impact on CDBC H6 Supported adoption
Central bank digital currencies (CBDCs) represent a key innovation in the 4.0 technology revolution, offering digital forms of money issued by central banks and supported by their assets They promise to enhance the efficiency, transparency, and inclusiveness of payment systems while promoting economic growth and financial stability The successful adoption of CBDCs relies on several factors, including institutional quality, regulatory frameworks, public trust, and technological readiness This research focuses on analyzing how institutional quality influences CBDC adoption across various countries and regions.
Research indicates that the Control of Corruption, Political Stability, Absence of Violence, and Government Effectiveness significantly influence the adoption of Central Bank Digital Currencies (CBDCs) Countries exhibiting higher governance quality are more inclined to develop and implement CBDCs compared to those with lower governance standards Consequently, enhancing governance quality is essential for the secure and effective advancement of CBDCs.
This article systematically reviews previous studies to establish a theoretical foundation for understanding Central Bank Digital Currency (CBDC) adoption It highlights that factors such as Control of Corruption, Government Effectiveness, Political Stability, and GDP per capita positively influence CBDC acceptance, while population growth tends to hinder it Despite achieving some expected research outcomes, the study acknowledges limitations, including the lack of distinction between retail and wholesale CBDCs and the narrow focus on economic growth variables Future research should consider additional factors like public trust in institutions and the Human Development Index to provide a more comprehensive evaluation Additionally, subsequent studies could focus on specific countries or regions over extended periods to deepen insights into CBDC adoption dynamics.
In summary, institutional quality plays a crucial role in shaping the adoption and effectiveness of Central Bank Digital Currencies (CBDCs) Various indicators of institutional quality can reflect distinct elements of the governance framework that influence the design and consequences of CBDCs Additional research is essential to explore the interaction between CBDCs and institutional quality across diverse contexts and situations.
[1] Abasimi, I., Li, X., & Khan, M I (2018) The impacts of institutions on International Trade in Ghana’s economic perspective International Journal of Academic Research in Economics and Management Sciences, 7(4), 3-43.
[2] Acemoglu, D., & Robinson, J A (2012) Why nations fail: The origins of power, prosperity, and poverty New York: Crown Publishers.
[3] Allen, F., Carletti, E., Cull, R., Qian, J., Sensoy, B A., & Valenzuela, P (2020) Central Bank Digital Currency and Financial System Structure Working Paper No 27100 National Bureau of Economic Research.
[4] Atlantic Council “Central Bank Digital Currency Tracker.” Atlantic Council, 2 June
[5] Auer R., Cornelli G., Frost J (2020) Rise of the central bank digital currencies: drivers,
[6] Bank for International Settlements (2020) Central bank digital currencies: foundational principles and core features Retrieved from https://www.bis.org/publ/othp33.htm
[7] Bank for International Settlements (2020) Central bank digital currencies: foundational principles and core features.
[8] Bank for International Settlements (2021) Central bank digital currencies: foundational principles and core features Retrieved from https://www.bis.org/publ/othp33.pdf.
[9] Brunnermeier M.K., James H., Landau J.P (2019) The digitalization of money NBER
Carstens, A (2019): “The future of money and payments”, Whitaker Lecture given at the Central Bank of Ireland, Dublin, 22 March.
[10] Cukierman, A., Webb, S B., & Neyapti, B (1992) Central bank independence: An update of theory and evidence World Bank Economic Review, 6(3), 353-398.
[11] Gaur, Vishal, and Gaiha, Abhinav "Building a Transparent Supply Chain Blockchain can enhance trust, efficiency, and speed." Harvard Business Review 98.3 (2020): 94-103.
[12] Hess, C (2020) Central Bank Digital Currency: Design Principles and Balance Sheet Implications International Monetary Fund.
[13] IMF (2022) IMF Board Endorses Implementation Plan in Response to Institutional Safeguards Review Retrieved from https://tinyurl.com/2fmql9mv
[14] International Monetary Fund (IMF) (2021) Central bank digital currencies: considerations for adoption.