Welcome to Latam Insights Encore. This dives deep into Latin America’s most relevant economic and crypto news last week. This edition explores how Colombia can introduce CBDC to face difficult tasks in modernizing the financial system of a country where cash is still king.
Latam Insights Encore: Columbia’s CBDCs won’t fly unless they have a large incentive
The announcement of Colombia’s existing Central Bank Digital Currency (CBDC) pilot raised several eyebrows this week. I live next to Colombia and understand how the financial system works in that country, so I think it’s too early for such a currency to be implemented.
Nevertheless, there is a great opportunity for the Colombian government to take people into the financial system without passing through banks, which brings friction to this process.
Colombians rely on cash as a payment method for most purchases. Nearly 80% of all transactions included 2024 cash, according to figures from the Central Bank of Columbia. This has hardly changed since 2022. This number is high among low-income people who show that cash is faster and easier to use, and there is a possibility of fraud associated with them, so they doubt electronic methods.
Central bank digital currency (CBDC) must fight these preconceived notions. This requires modernising the payment system, even if it includes more than 90% of finance.
To do this, you will need to refer to it with large incentives, such as discounts and savings benefits for the citizens involved. Credit may be an interesting weapon to encourage citizens to virtual CBDCs, as only 36.2% of Colombian adults can use some kind of credit product. Special credit promotions can also be introduced by Colombians to accept this new currency and similarly as a payment method.
This mission is rather difficult considering that despite all the risks associated with cash handling at the time, cash usage did not move significantly during Covid-19. Nevertheless, the currency is still in the pilot phase, and there is no news yet about its final introduction.
Read more: Report: Colombia running CBDC pilots on Cosmos
