The term digital currency has been associated with Bitcoin and other digital currencies for a while – but now, there’s a new player in town: the central bank digital currency (CBDC). In recent years, many central banks have explored the idea of creating a digital version of their currency, and the Covid-19 pandemic seems to have accelerated their plans.

CBDCs can be defined as digital representations of a country’s fiat currency that are backed by the central bank. Unlike cryptocurrencies, which have decentralized networks and are not backed by any central authority or government, CBDCs would be issued and regulated by central banks.

One significant advantage of CBDCs is that they could help boost financial inclusion. According to the World Bank, 1.7 billion adults worldwide don’t have access to financial services, such as a bank account. CBDCs can offer a potential solution to this problem by providing a more accessible and affordable payment system.

Some of the ways CBDCs can help promote financial inclusion include:

1) Increased access to financial services: CBDCs can be accessed using a smartphone or any other digital device. This means that individuals who don’t have access to traditional banking services can still participate in the financial system.

2) Lower transaction costs: CBDCs eliminate intermediaries, such as banks and payment processors, reducing transaction costs.

3) Greater financial stability: Central banks can use CBDCs to reduce the risk of financial crises. CBDCs can offer a more stable and secure payment system, which can help prevent financial instability.

4) Increased transparency: CBDCs can provide greater transparency in financial transactions. Blockchain technology can be used to record and track transactions, making them more secure and fraud-resistant.

However, CBDCs aren’t a panacea for financial inclusion. There are several challenges that need to be addressed before they can achieve their potential benefits. These challenges include:

1) Technological infrastructure: CBDCs require robust technological infrastructure to be successful. Many developing countries don’t have the necessary infrastructure, which could limit their ability to implement CBDCs.

2) Privacy concerns: CBDCs could give central banks greater control over citizens’ financial data, which could raise concerns over privacy and surveillance.

3) Digital literacy: Not everyone is comfortable using digital devices, which could limit the adoption of CBDCs.

In conclusion, CBDCs could have the potential to help boost financial inclusion. They can offer a more accessible and affordable payment system, reducing transaction costs, and increasing transparency in financial transactions. However, there are several challenges that need to be addressed, including a lack of technological infrastructure, privacy concerns, and digital literacy. Nonetheless, if these challenges can be overcome, CBDCs could have a significant impact on promoting financial inclusion. Therefore, central banks need to continue exploring CBDCs’ potential while addressing these challenges.