Khóa luận tốt nghiệp: The impact of institutional quality on CBDC : Adoption - International Perspective

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

VIETNAM NATIONAL UNIVERSITY UNIVERSITY OF ECONOMICS AND BUSINESS

FACULTY OF FINANCE AND BANKING

GRADUATION THESIS

2022 - 2023

TOPIC

THE IMPACT OF INSTITUTIONAL QUALITY ON CBDC

Teacher Instruction Ph.D Luu Ngoc Hiep

Student name Pham Thi Bich Ngoc - 19050709

Class QH 2019-E TCNH CLC 4

Hanoi, May, 2023

I hereby declare that this research paper “THE IMPACT OF INSTITUTIONAL QUALITY

ON CDBC ADOPTION - International Perspective” is the product of my own study In thereferences section of the graduation thesis, the use of references are clearly mentioned.The information and findings provided in the graduation thesis are accurate If I amwrong, I will accept full liability and be held to all of the subject’s and university’s rules

Signature of teacher instruction Signature of student

First of all, Iwould like to express my deep gratitude to the teachers and instructors at theUniversity of Economics and Business- VNU, especially the instructor Ph.D Luu Ngoc Hiephas wholeheartedly helped me to complete the graduation thesis I would also want to

express my deep gratitude to the professors at the Faculty of Finance and Banking- UEB

for providing me with many valuable information so that I can complete the thesis andcreate a solid foundation for my future career

My thesis still has some errors and weaknesses due to limited knowledge and reasoning

ability, however, we hope that the feedback and contributions of teachers will help my

thesis be more completed

Best regards,

ContentsI6 1

2 THEORETICAL BACKGROUND AND EMPIRICAL LITERATURE -c cs-ccsecrx 5

2.1 Theoretical framework eseeessesseesseesssecseesseecseesseecseesseesaeesseesseesseesaeesseesseesseessessseesaeeneeneeaeeeaeeensees 5

2.1.1 The current state of CDBC adoption in the WOrId ssesssesssesssesssecssesssecseesssesseesseesseeees 5

2.1.2 The current state of Institutional Quality in the worÌd -« c«-cce-xee 7

VÄPu2y 0/0 ố 8

2.2.1 The factors affacting the adoption Of CDBC «ccccceeriekitiieriiirke 8

2.2.2 Institutional Quality and their impact on the socioeconomic and environment

3.2 Model development and sample sel@CtÏOI -ssccxecsrxerrrxetrrrrrtrtrrrrrrrrrkkrrke 15

3.3 Research variables esssesssssscssesssessessssssseessesssesssessseessessseeassesseesueessesseesseessteeneeateeseessseensenseesseenes 16

3.3.1 CDBC adoption 0 eesesssessssessstessssecsseessseessseessueessseesssessaseesseesasessusarsueeesueessseesaneessneesnseesnseessess 163.3.2 Institutional Quality -c«cccr HH HH 1 H111 111111 rrkrry 16

3.3.3 Hypothesis - Institutional factors that infuence the adoption of CDBC by a

COUIẨYV s- + HH HH HH HH HH HH HH HH HH HH HHHHHETEREEEHEEEEEE-EHEEELHEEE-EEELEELELLHH+ 18

4 Empirical results and điSCUSSÏOII c- 5+ E111 1111k 25

4.1 Descriptive SfatÏSECS HH1 HH HH nư 254.2 Correlation Matrix c.eecessessessecsesssecseesessessecseesesseesseessessecseeneeseecseeseeseeseeseeateaeeaeeatesteeneeaeeateeneenees 26

La nh 274.4 Compare with hypOtÏeSÌS 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

List of TablesTable 3.1: Institutional Quality factors esssessecsecsessesseesseesseesssecseesssssseessesssessseesneessessseesneesseenees 18Table 3.2: Control variabÌe@S ss-cs+cct th HH Hà Hà Hà Hành trrretrriet 22

Table 4.1: Descriptive Statistics ch hà ngưng 25

Table 4.2: Correlation ImafFÏX - 5<: 5s<< + LH xHETHỰ HH HHà Hà Hà Hà Hà Hà HH gi net 26Table 4.3: Impact of institutional quality on CBDC adoption « -<c-cce-xee 27

Table 4.4: The validation results of the hypotheSe6s ‹s ccecrkierrtirrriirrrirrrriiririirriee 30

Improvement of institutional quality has long been known as an intuitive and

continuous goal of governments around the world (Kaufmann 2011; Nort 1990) They try

to achieve it by enhancing several foreign and domestic matters, including theeffectiveness and efficiency of public institutions in delivering public goods and services,

as well as the security and predictability to international transactions (Citizendium,2021) Central banks are increasingly considering the issuance of digital forms of fiatcurrency, encouraged by the recent advancements in payment systems that are driven bytechnology, such as mobile payment systems, cryptocurrencies, and blockchaintechnologies (Ngo et al, 2023) But they are not controlled by any central authority, such

as a government or bank, but rather by a network of computers that enforce a distributedledger, such as a blockchain (Merriam-Webster, 2023) One of such tool is the central bankdigital currency (CBDC), which is the digital form of a country’s fiat currency issued by thecentral bank (BIS 2020) Unlike cdbc, CBDC has a fixed value that is equivalent to thecountry's fiat currency and is backed by the full faith and credit of the government (BIS,2020) CBDC appears as a tool to help countries monitor economic activities as well aslimit bribing at local officials levels (McKinsey, 2023) CBDC is emerging as a tool tosupport institutional quality improvement for several reasons The first, CBDCs canfacilitate direct and efficient government transfers to citizens, especially during times ofcrisis or emergency CBDCs can also reduce the costs and risks associated with cashhandling and distribution (Allen et al 2020) Second CBDCs can enhance financialinclusion and access by providing a universally accessible and low-cost paymentinstrument for the unbanked and underbanked populations Thirdly, CBDCs can alsofoster competition and innovation in the payment system by creating a level playing fieldfor new entrants and service providers (Allen et al 2020) Forth, CBDCs can improvemonetary policy transmission and effectiveness by allowing the central bank toimplement negative interest rates or helicopter money more easily and directly CBDCscan also provide the central bank with more granular and timely data on economic activity

and financial flows, which can inform better policy decisions (IMF 2021) And finally,

CBDCs can strengthen financial stability and integrity by reducing the reliance on privateintermediaries and enhancing the resilience of the payment system against cyberattacks

or operational failures CBDCs can also support anti-money laundering and

counter-terrorism financing efforts by enabling traceability and auditability of transactions (Allen

et al 2020)

Some Central Banks (CB) have started to analyze the potential to issue digitalcurrencies of their own Introducing a CBDC will have implications on the role of theCentral Bank and may have knock-on impacts on financial intermediation CBs already

offer access to their digital account-based CB money to banks and a limited number of

other institutions Several countries have expressed interest in adopting CBDC for these

motivations According to the Atlantic Council (2022), 114 countries, representing over

95 percent of global GDP, are exploring a CBDC Some countries have already launched or

piloted a CBDC, such as China, Jamaica, Bahamas, Cambodia, Ukraine, Nigeria, and

Venezuela Others are in the development or research stage, such as Australia, Thailand,Brazil, India, South Korea, Russia, and the European Union The adoption of CBDC variesdepending on the country's specific needs, objectives, and challenges Therefore, each

country should carefully assess the potential benefits and costs of CBDC before making a decision (PwC, 2021) By using CBDC, countries can enhance their financial inclusion,

simplify their monetary and fiscal policy implementation, and reduce their transactioncosts (Federal Reserve Board, n.d.) One of the potential benefits of central bank digitalcurrencies (CBDCs) is that they could help countries improve their institutional quality byincreasing transparency and accountability in the monetary system (BIS, 2021) CBDCscould ensure open payment platforms and a competitive level playing field that is

conducive to innovation and serves the public interest (BIS, 2021).

The financial system is complex, and any changes made to it must be thoroughlyconsidered CBDCs can create open payment platforms and a competitive environmentthat fosters innovation and benefits the public (BIS, 2021) However, CBDCs also poserisks and challenges that central banks must carefully address before adopting them Thedesign and implementation of CBDCs involve ensuring the interoperability, scalability,privacy, and cyber resilience of the platform (Hess, 2020), as well as considering the

potential implications for the financial system and economy, such as disintermediation of banks, loss of seigniorage revenue, capital flight, currency substitution, or digital

dollarization (Allen et al., 2020) Therefore, central banks must carefully weigh the costsand benefits of CBDCs, design them to maximize positive impact on institutional qualitywhile minimizing negative impact on financial stability and monetary sovereignty, andcooperate with international partners in their implementation (BIS, 2021) CBDC

adoption varies across countries and regions based on their respective motives,

challenges, and opportunities (BIS, 2021) This research aims to investigate the impact ofinstitutional quality on CBDC adoption and how CBDCs can support institutional quality

improvement By examining CBDC adoption motivations and challenges, this research

seeks to provide insights into how countries can effectively use CBDCs to supportinstitutional quality improvement

Given the positive-negative tradeoff of CDBC to the monetary system, financial

stability, and economic growth, understanding which factors might affect the adoption of

CDBC is of crucial importance However, limited empirical studies have discussed theimpact of specific institutional factors on CDBC adoption Therefore, the primary objective

of this thesis is to examine the relationship between institutional quality and CBDC

adoption This involves identifying the factors that influence the adoption of CBDCs indifferent countries and analyzing the extent to which institutional quality affects thelikelihood of CBDC adoption.In this thesis, the relationship between institutional quality

and CBDC adoption is examined The next step is to determine which specific institutional

quality factors are most influential in determining CBDC adoption Finally, it is important

to clarify how the impact of institutional quality on CBDC adoption varies across different

countries or regions

In order to achieve the above research goal, the following questions need to be

studied: (1) What is the relationship between institutional quality and CBDC adoption? (2): What specific institutional quality factors are most influential in determining CBDC adoption? (3): How does the impact of institutional quality on CBDC adoption vary across

different countries or regions?

To estimate the institutional quality determinants of CDBC adoption in eachcountry, we collect data from the World Bank World Development Indicators (WDI) andWorldwide Governance Indicators reports, which include measures of governmenteffectiveness, regulatory quality, and rule of law As well as macroeconomics data fromthe World Bank CBDC adoption will be measured using the CBDC Index developed by the

Bank for International Settlements (BIS), which measures the readiness of countries to

adopt CBDC based on factors such as technological infrastructure, regulatoryenvironment, and public demand The author use a quantitative research approach toinvestigate the impact of institutional quality on CBDC adoption The author useregression analysis to test the relationship between institutional quality factors and CBDC

3

adoption The study will also use qualitative analysis to explore how the impact of

institutional quality on CBDC adoption varies across different countries or regionsin theperiod from 2010 to 2021

The structure of the thesis rest of the theis will be as follows In Section 2 discussrelated literature and presents the theoretical framework of CDBC and Institutionalquality Research hypothesis will be proposed in Section 3 and in this section, the authorillustrate the research data and models specification Section 4 presents empirical results

Section 5 is the conclusion.

2 THEORETICAL BACKGROUND AND EMPIRICAL LITERATURE

In this section, empirical literature, and the theoretical background will be

reviewed In particular, the theoretical background relating to CDBC adoption and

Institutional quality will be illustrated in this section These theories are the foundationfor the author to develop the research In the second section, empirical literature will bereviewed This section will provide an overview of past research on three interrelatedtopics: (1) the impact of institutional quality on the economy, (2) the determinants of

CDBC adoption, and (3) the relationship between CDBC adoption and institutional quality.

The literature on each of these areas will be synthesized and evaluated in order to lay thegroundwork for the current study

2.1 Theoretical framework

2.1.1 The current state of CDBC adoption in the world

Central Bank Digital Currency (CBDC) is a digital form of cash issued by a nation'scentral bank that has the full backing of the central bank The Bank of England havedescribed a CBDC as electronic CB money that: (i) Can be accessed more broadly thanreserves, (ii) Potentially has much greater functionality for retail transactions than cash,(iii) Has a separate operational structure to other forms of Central Bank money, allowing

it to potentially serve a different core purpose, and (iv) Can be interest bearing, underrealistic assumptions paying a rate that would be different to the rate on reserves

(Kumhof, M., Noone, C., 2018) CBDCs are seen as a way to increase efficiency, promote

competition, provide a stable and regulated digital currency, and reduce dependence onforeign currencies

According to the Atlantic Council, a total of 87 countries are exploring issuing aCBDC as of March 2022, compared to just 35 countries in May 2020 Central Bank DigitalCurrencies (CBDCs) have become a popular topic of discussion in the global financialsystem, with many countries considering the development of their own digital currencies(BIS, 2021) The Bank for International Settlements (BIS) conducted a survey in 2020,which revealed that over 80% of central banks around the world were engaged in someform of CBDC work, with about 40% actively pursuing CBDC development (BIS, 2020).The main motivations for CBDC development were found to be improving payment

system efficiency, increasing financial inclusion, and maintaining monetary sovereignty

5

(BIS, 2021) CBDCs have attracted increasing attention from policymakers and

researchers as they may have a fundamental impact on both domestic and internationaleconomic and financial stability (IMF 2023) According to a survey conducted by the Bank

for International Settlements (BIS) in 2020, most central banks are exploring CBDCs for

various reasons, such as enhancing payment efficiency, promoting financial inclusion,strengthening monetary sovereignty, and supporting innovation (Boar et al 2020)

Among the countries interested in CBDCs, some have made advanced steps towards

launching or piloting their own digital currencies, such as China, Bahamas, Jamaica,Sweden, Uruguay, and Cambodia (Atlantic Council 2022) These countries expect thatCBDCs will improve their institutional quality by enhancing governance, rule of law, and

reducing corruption Moreover, CBDCs may have implications for financial stability,

monetary policy transmission, international spillovers, and digital sovereignty (Adrian2019; BIS 2018; IMF 2018)

While domestic CBDCs have been the focus of much attention, there are also

international CBDC projects involving more than one country One such project is the

CDBC dictionary, which aims to create a common language and definitions for CBDCs (BIS,2021) Another example is the Multiple CBDC (mCBDC) Bridge, a joint project of the HongKong Monetary Authority and the Bank of Thailand, which aims to facilitate cross-borderpayments using CBDCs (HKMA, 2021) These international CBDC projects aim to improveinstitutional quality by enhancing cross-border payment efficiency, reducing payment

settlement risk, and promoting financial inclusion (Bank of Canada, 2021) Additionally, they seek to foster international cooperation and coordination in the development and

implementation of CBDCs, which can contribute to global financial stability (BIS, 2021).However, these projects also face challenges related to interoperability, governance, andlegal frameworks across different jurisdictions, which need to be addressed to ensuretheir successful implementation (BIS, 2021) Therefore, these international CBDC projectsrequire careful consideration and cooperation among participating countries to

effectively contribute to institutional quality improvement Second is Dunbar Project, this project is led by the BIS Innovation Hub in partnership with the Reserve Bank of Australia,

Central Bank of Malaysia, Monetary Authority of Singapore, and South African ReserveBank It developed two prototypes for a shared platform that could enable international

settlements using digital currencies issued by multiple central banks The platform was

designed to facilitate direct cross-border transactions between financial institutions indifferent currencies, with the potential to cut costs and increase speed The project

6

identified challenges ofimplementing a multi-CBDC platform shared across central banksand proposed practical design solutions to address them (BIS Innovation Hub, 2022) IMFApproach to CBDC Capacity Development: The IMF provides technical assistance and

policy advice to its member countries on various aspects of CBDC design and

implementation, such as legal frameworks, governance structures, operational models,technology choices, risk management, and international coordination The IMF also

facilitates peer learning and knowledge sharing among central banks through workshops,

seminars, webinars, and publications The IMF has received requests for CBDC capacitydevelopment from over 40 countries (IMF, 2023) By enhancing institutional quality,central banks can foster trust and confidence in their CBDCs among users, partners, and

regulators; mitigate potential risks and challenges; and leverage the opportunities and

benefits of digital innovation

2.1.2 The current state of Institutional Quality in the world

According to the World Bank's "Worldwide Governance Indicators" report, whichreports aggregate and individual governance indicators for over 200 countries andterritories over the period 1996-2021 The report measures six dimensions ofgovernance: voice and accountability, political stability and absence of violence,government effectiveness, regulatory quality, rule of law, and control of corruption

Institutional quality is a key factor for economic development and social welfare It refers

to the extent to which institutions are able to provide public goods and services, protectproperty rights, enforce contracts, and prevent corruption Different countries have

different levels of institutional quality, depending on their history, culture, politics, and

geography Some countries that have improved their institutional quality in recent yearsare Estonia, Rwanda, Georgia, and Chile These countries have implemented reforms toenhance their governance, rule of law, regulatory quality, and control of corruption

(World Bank, 2020) The latest WGI report, released in September 2022, shows that there

is significant variation in governance performance across countries and regions, as well

as over time In-depth analysis of some aspects of the WGI report for 2021, which was

released in September 2022 by Daniel Kaufmann, President Emeritus of Natural Resource

Governance Institute (NRGI) and Brookings Institution, and Aart Kraay, World BankDevelopment Economics, the world has experienced some improvements but also somesetbacks in institutional quality over the past decade For example, the report shows thatVoice and Accountability, which measures the extent to which citizens can participate in

7

selecting their government and enjoy the freedom of expression, association, and media,

has improved slightly on average across countries since 2010, but with significantvariation across regions and countries Some countries, such as Myanmar, Venezuela, andBelarus, have experienced sharp declines in this dimension, while others, such as Tunisia,Armenia, and Sudan, have seen notable improvements The report also highlights some ofthe challenges and opportunities for improving governance in the context of the COVID-

19 pandemic, which has posed unprecedented threats to public health, economic stability,and social cohesion The report notes that "the pandemic has underscored the importance

of effective governance for managing complex crises, delivering public services, ensuringaccountability and transparency, and protecting human rights" However, it also warns

that "the pandemic has also created opportunities for some governments to undermine

democratic institutions, restrict civic space, and weaken checks and balances"

Similarly, Political Stability and Absence of Violence/Terrorism, which measuresthe likelihood of political instability and violence or terrorism that could threaten thegovernment's ability to provide basic security and services to its citizens, has alsoimproved slightly on average across countries since 2010, but with considerableheterogeneity across regions and countries Some countries, such as Syria, Yemen, andLibya, have suffered from severe civil wars and humanitarian crises that have underminedtheir political stability and security, while others, such as Colombia, Sri Lanka, and Nepal,have made progress in resolving their internal conflicts and reducing violence

Government Effectiveness, which measures the quality of public services and policies as well as the degree of independence from political pressures and corruption that public

officials enjoy in carrying out their duties, has remained relatively stable on averageacross countries since 2010, but with some deterioration in some regions and countries

Some countries, such as Brazil, South Africa, and Malaysia, have faced challenges in

maintaining or improving their government effectiveness due to political scandals oreconomic crises that have eroded public trust and confidence in their institutions

2.2 Literature review

2.2.1 The factors affacting the adoption of CDBC

According to a survey by the Bank for International Settlements (BIS) in 2020,social factors such as trust, convenience, privacy and financial inclusion are importantdrivers of CBDC demand The survey found that people who trust their central bank are

8

more likely to use CBDC than those who do not Moreover, people who value convenience

and ease of use are more likely to adopt CBDC than those who prefer cash or otherpayment methods Privacy is also a key factor that influences CBDC demand, as people

may have different preferences and expectations regarding the protection of their

personal and transaction data Finally, financial inclusion is another social factor thataffects CBDC adoption, as CBDC may offer an opportunity to reach the unbanked and

underbanked population and provide them with access to digital financial services.

Luu et al (2022) examine the impact of cultural values on the adoption of centralbank digital currency (CBDC) by individuals It aims to explore the relationship betweencultural values and the intention to use CBDC in different countries Hofstede's culturaldimensions theory is used to examine the relationship between cultural values and CBDCadoption The results show that individualism and uncertainty avoidance have a positiveeffect on the intention to use CBDC, while power distance has a negative effect.Policymakers should take cultural values into account when designing and implementing

CBDC policies CBDC adoption depends on economic and monetary policy factors Novi et

al (2022) argue that policy makers should make CBDCs easy to use and accessible andefficient to increase adoption rates and make CBDCs a viable alternative to traditionalpayment systems However, they also recognize the potential difficulties of CBDCimplementation, such as the need for infrastructure investment and the possibledisruption of existing financial systems They also examine the monetary policy

consequences of CBDCs, such as their impact on interest rates and financial stability risks.

Governance and monetary policy factors influence public acceptance of CBDC adoption.Ngo et al (2023) showed that good governance practices, such as transparency and citizeninvolvement, can increase public trust and positively affect public acceptance Monetary

policy factors, such as stability and convenience, can also affect public acceptance of CBDC

adoption

Bijlsma et al (2021) conducted a study and identified four dimensions that

influence consumers’ adoption of central bank digital currencies (CBDCs): technology, user characteristics, economic and financial environment, and institutional environment.

They argued that trust is a crucial factor for CBDC adoption and emphasized theimportance of ensuring the reliability and security of CBDC technology The authors alsosuggested that central banks should consider various factors and design CBDCs that meetthe needs and preferences of users Similarly, in 2021, C Casanueva et al focused on the

economic factors that drive CBDC adoption The authors found that transaction costs,

payment speed, and access to financial services were significant drivers of CBDC adoption,and they suggested that CBDC could improve financial inclusion for underbankedpopulations However, the authors also cautioned that there may be potential challengessuch as the need for significant investment in infrastructure and the possibility ofdisrupting existing financial systems

2.2.2 Institutional Quality and their impact on the socioeconomic and environment

One of the areas where institutional quality can have a significant impact is financialinclusion Financial inclusion is the access and use of formal financial services byindividuals and businesses It can promote economic growth, reduce poverty, and fostersocial cohesion However, financial inclusion is not only determined by the supply and

demand of financial services, but also by the institutional environment that supports

them For example, strong legal frameworks, effective supervision, transparentinformation, and consumer protection can enhance trust and confidence in the financialsystem (Demirguc-Kunt et al., 2018) Using a system GMM model, Evan (2021) examinespanel data from 33 African countries to explore the determinants of digital financialinclusion in Africa The paper shows that financial inclusion is low and heterogeneousacross the continent The paper also reveals that various social and institutional factorsinfluence digital financial inclusion in Africa Specifically, the paper estimates that income,education, mobile phone penetration, gender inequality, corruption, political stability,and financial sector development have significant effects on digital financial inclusion inAfrica The paper suggests that policymakers should enhance financial literacy, curb

corruption, foster political stability, and strengthen the financial sector to boost digital

financial inclusion in Africa

Law et al (2012) argue that institutional quality and governance are crucial

determinants of financial development by examining the relationship between

institutional quality, governance, and financial development in a sample of 27 countriesfrom 1996 to 2013 The results show that institutional quality and governance areimportant determinants of financial development Countries with better institutional

quality and governance have a more developed financial system and are more attractive

to foreign investors Financial development can improve institutional quality andgovernance To examine the relationship between institutional quality and firm

performance across countries, Chang (2023) argues that institutional quality affects firm

10

performance, and this relationship varies across countries Institutional quality refers to

the quality of government policies, regulations, and enforcement, and it is measured usingWorldwide Governance Indicators The paper suggests that institutional quality affectsfirm performance by influencing factors such as investment, productivity, innovation, andentrepreneurship

Several authors have examined the relationship between institutional quality and

financial inclusion or digitalization For example, Demirgủc-Kunt et al (2018) found thathigher institutional quality is associated with higher levels of financial inclusion acrosscountries Similarly, Andrianaivo et al (2011) found that better institutional quality ispositively correlated with higher levels of mobile phone penetration and mobile bankingusage in Africa Higher institutional quality is associated with higher levels of digitalfinancial inclusion, and that institutional quality can moderate the effects of other factorssuch as income level, education level, and infrastructure development on digital financialinclusion (Asongu et al., 2019; Batuo et al., 2020; Naceur et al., 2020) These studies

suggest that improving institutional quality can foster financial inclusion and

digitalization by creating an enabling environment for innovation, competition, trust andsecurity in the financial system

2.2.3 "Institutional quality" for countries that adopt CDBC

CBDCs are digital forms of fiat money that are issued and regulated by centralbanks They aim to provide a secure, efficient and inclusive means of payment for thepublic However, the adoption of CBDCs may depend on the political and social context ofeach country, as well as the trust and confidence that people have in their governmentsand central banks

Political stability and absence of violence are indicators of how peaceful and

orderly a society is, and how well the government can provide public goods and services,

such as security, justice, health and education These factors may affect the demand and

supply of CBDCs in different ways On the demand side, people may prefer to use CBDCs

if they perceive them as more reliable and convenient than cash or other paymentmethods, especially in situations where there is political unrest, violence orhyperinflation For example, in Venezuela, where the national currency has lost most ofits value due to economic mismanagement and sanctions, some people have turned tocryptocurrencies as an alternative means of payment and store of value (Brito et al.,

11

2019) A CBDC could potentially offer a similar solution for people who seek to preservetheir purchasing power and avoid the risks and costs associated with cash or foreigncurrencies On the supply side, governments and central banks may have differentincentives and challenges to issue CBDCs depending on their political stability andabsence of violence In countries where there is a high degree of political stability andabsence of violence, governments and central banks may have more resources and

capacity to design and implement CBDCs that meet the needs and preferences of their

citizens They may also face less resistance or opposition from vested interests or groupsthat may perceive CBDCs as a threat to their power or influence For example, in Sweden,where there is a high level of political stability and absence of violence, the central bank

(Riksbank) has been conducting a pilot project to test the feasibility and usability of an

e-krona, a digital version of the Swedish krona (Riksbank, 2020) The Riksbank has statedthat its main motivation for issuing an e-krona is to ensure that the public has access to a

state-guaranteed means of payment in a context where cash usage is declining rapidly.

In contrast, in countries where there is a low degree of political stability andabsence of violence, governments and central banks may face more difficulties and risks

to issue CBDCs that are effective and beneficial for their citizens They may lack thetechnical expertise, infrastructure or governance mechanisms to design and implementCBDCs that are secure, efficient and inclusive They may also face more challenges to gainthe trust and confidence of their citizens, who may be skeptical or distrustful of their

motives or intentions For example, in China, where there is a low level of political stability and absence of violence according to some measures (World Bank, 2019), the central bank (People's Bank of China) has been developing a digital currency/electronic payment

(DCEP) system, which is expected to be launched soon (Fan et al., 2020) The DCEP system

aims to enhance the efficiency and convenience of payments, as well as to support the

internationalization of the renminbi However, some observers have raised concernsabout the potential implications of the DCEP system for privacy, surveillance and social

control by the Chinese government (Chorzempa et al., 2020).

According to a recent report by PwC, Government effectiveness is one of the fourdimensions that determine the level of readiness for CBDC adoption across 60 countries.The report uses a composite index based on various indicators from the World Bank'sWorldwide Governance Indicators (WGI) database to measure government effectiveness.The report finds that countries with higher government effectiveness tend to have higher

12

CBDC readiness scores, while countries with lower government effectiveness tend to have

lower CBDC readiness scores For example, China, which has launched a pilot program forits digital yuan, ranks first in terms of government effectiveness and second in terms ofCBDC readiness On the other hand, Venezuela, which has issued a digital currency calledPetro backed by oil reserves, ranks last in terms of government effectiveness and 59th interms of CBDC readiness A group of seven central banks (Bank of Canada, Bank ofEngland, Bank of Japan, European Central Bank, Federal Reserve, Sveriges Riksbank andSwiss National Bank), together with the Bank for International Settlements (BIS), havepublished a series of reports on various aspects of CBDC design and implementation Thereports identify some common foundational principles and core features that a general

purpose or retail CBDC should have, such as coexistence with cash and other forms of

money; compliance with regulations; convenience; efficiency; innovation; integrity;interoperability; resilience; safety; security; etc The reports also explore some specific

topics related to system design and interoperability; user needs and adoption; financial stability implications; etc The reports emphasize that each central bank should make its

own decision on whether to issue a CBDC based on its own circumstances and objectives

Both voice and accountability are essential for good governance and democraticlegitimacy, which are crucial for the success of any public policy initiative, includingCBDCs One of the main arguments in favor of CBDCs is that they can increase financialinclusion by providing access to digital payments and savings for the unbanked and

underbanked populations However, this argument assumes that these populations have

sufficient voice and accountability to demand and benefit from CBDCs In some countries,especially those with low levels of democracy and human rights, voice and accountabilityare severely constrained by political repression, censorship, corruption, and inequality

In such contexts, CBDCs may not be designed or implemented in a way that meets the

needs and preferences of the marginalized groups, but rather serves the interests of theruling elites or powerful corporations Moreover, CBDCs may pose threats to privacy and

civil liberties, as they could enable greater surveillance and control over financial transactions by the authorities (Chiu et al., 2020) Another argument in favor of CBDCs is

that they can improve the efficiency and stability of the monetary system by reducingtransaction costs, enhancing competition, and facilitating monetary policy transmission

However, this argument also depends on the level of voice and accountability in the

system In some countries, especially those with high levels of corruption and politicalinstability, voice and accountability are undermined by rent-seeking, patronage,

13

nepotism, and clientelism In such contexts, CBDCs may not be implemented in a

transparent and accountable manner, but rather used as a tool for political manipulation

or economic mismanagement Moreover, CBDCs may create new risks for financialstability, as they could trigger bank runs, increase cyberattacks, or undermine centralbank independence (Brunnermeier et al., 2019)

In conclusion, CBDC adoption is complex that depends on various factors related

to government effectiveness and impact on the monetary and financial system Central

banks should carefully weigh the costs and benefits of issuing CBDCs based on rigorous

analysis and evaluation of their potential effects on economic efficiency, social welfareand financial stability

2.2.4 Research Gap

In general, most studies focus on clarifying aspects of the theoretical basis in

considering the socio-economic impacts of CDBC The adoption of CDBC revolves around

cultural, monetary and socioeconomic factors However, there have not been many depth studies on the impact of specific institutional factors representing prominent

in-aspects of institutional quality on CDBC adoption Therefore, more research on this topic

is needed to fill this gap in previous studies and make certain contributions boththeoretically and practically Institutional quality is a key factor influencing the adoption

and impact of CBDCs Different measures of institutional quality may reflect different aspects of the institutional environment and governance structure that influence design

choices

14