The central bank of Nepal issued a notice about the circulation of new currency notes for Dashain. Thereafter, it also released one more circular that invited consultations from the public to explore the prospects for launching digital currency in an economy that is largely cash-based. Only 67.3 percent of Nepal’s population had access to banking services using one unique bank account as of mid-June 2020, as per the financial access report of the central bank. The dream of introducing digital currency in the economy and transitioning towards a cashless society remains utopian as long as a majority portion of the population is not inducted into the banking system.

To convert such a dream into a reality, appropriate enabling infrastructure in the form of suitable connectivity and mobile devices need to be put in place to be able to reach every nook and corner of the nation including far-flung places devoid of any kind of banking facilities. Thus, rolling out any kind of innovative digital product is not only fraught with many technical obstacles, but it also involves overcoming several critical challenges relating to digital awareness, digital access, digital availability and digital affordability.

The prospects

There are three kinds of digital currencies, namely, (i) Central bank digital currencies (CBDC), (ii) Crypto currencies, and (iii) Virtual currencies. Investments in crypto currencies and non-fungible tokens are regarded as highly speculative in character as they are susceptible to volatilities involving both plunges and upswings. Countries like India, Bangladesh and Pakistan are coming up with feasibility reports for the introduction of CBDC as a more secure and safer substitute for such investments. On similar lines, the central bank of Nepal has also taken such an initiative, and it can be considered timely and pertinent in the given scenario.

There is ample research evidence to support the rationale for launching CBDC. The immediate motivating factors could be found in the form of a reduction in usage of actual cash, provision of digital means of payment that are almost cash-like, providing a big boost to such digital payment services, injecting and creating a healthy competition among payment service providers, efficiency enhancement, and a perceptible reduction in the cost of providing financial services. An Asian Development Bank report of 2021 stated that the entire Pacific region was plagued by financial inclusion and remittance problems, for which a well-designed and implemented CBDC offered a pragmatic solution. CBDC has to be designed only after giving due emphasis to all the reputational and cyber security risk dimensions as is demonstrated by various research studies.

Going by the global trend of more and more economies going digital, it is only a matter of time before the much-hyped digital currency is put into circulation and gains momentum resulting in financial inclusion and accelerated economic growth aided and assisted by wallet, innovations and digital transformations such as meta-verse. Generally, cash-based systems are vulnerable to rampant corruption, especially in low-income economies. Moreover, the contraction in economic activity led to the hoarding of cash. Digital currency can ensure transparency and offset such undesirable practices by providing security and mechanisms for tracing the money. As our currency is pegged to the Indian rupee, the speed of digitalisation also depends on that of the Indian currency. It is hoped that transactions involving illegal currency will not happen once Indian currency becomes totally digitised. In addition, any decision to go for digital currency in Nepal would also have an impact on remittances made through informal channels.

The challenges

In a predominantly hard currency economy like Nepal, people handle bank notes not only in normal times but especially during festivals such as Dashain and religious ceremonies. In such a setting, migrating to digital platforms and moving over to digital currency requires a change in attitudes, preferences and mindset. Going by global trends, Nepal is also likely to catch up with universal wallets like Google Wallet and other indigenously developed ones, which work with or without internet connectivity, and are presently in use and gaining acceptance and prominence. We need to keep in place a supportive internet-driven infrastructure and all the required digital devices to be able to keep pace with the digitisation momentum and also the changing behavioural patterns of the common people.

Productive utilisation of the internet is missing, despite large segments of the Nepali population having internet connectivity and using mobile devices. This is mostly due to a lack of digital awareness and skills on the part of the people, which is of paramount importance for any effective implementation of digital innovation. This calls for governmental intervention in association with all private stakeholders. In this context, the importance of sensitising and educating people about data privacy and security need not be overemphasised. Glaring disparities between men and women in terms of owning a personal bank account, independent mobile ownership and access to the internet and other electronic devices are causing the digital gender divide in Nepal. This demands a focused training intervention targeted at womenfolk centring on cyber security and productive use of the internet.

To conclude, the introduction of digital currency in a country like Nepal, which is a hard currency economy, is fraught with cultural challenges. There has always been a sense of exuberance and excitement to hold brand new currency notes during the festival days of Dashain, which continues to remain one of the characteristic hallmarks of the Nepali socio-cultural milieu. The general public at large in Nepal has a typical currency-handling culture that is rooted in the traditional hard currency mindset. In this context, it would be prudent on the part of the central bank to wait for some time before full-scale digital currency adoption and be on the watch for the experiences of neighbouring countries. All decisions that involve the design, adoption and implementation aspects of CBDC or any other type of digital money should not be pivoted on technical criteria alone but also on cultural implications.