Central banks and Digital Public Infrastructure : Policy considerations
Discover how central banks and financial regulators can harness Digital Public Infrastructure to drive inclusive economic growth in Least Developed Countries, addressing challenges in regulation, stability, and interoperability for a brighter digital future.
Digital Public Infrastructure (DPI) is fast becoming the backbone of modern economies, enabling access to essential services such as payments, identity, and data exchange systems. For Least Developed Countries (LDCs), DPI presents a unique opportunity to leapfrog traditional development barriers and foster inclusive economic growth.
In this blog, we will explore the regulatory, financial, and technological considerations for central banks and financial regulators who play a pivotal role in ensuring that DPI serves as an inclusive, secure, and sustainable foundation for future growth.
The UNCDF Policy Accelerator offers expertise, targeted technical assistance, convening multi-stakeholder dialogues, and leveraging its expertise in blended finance, to assist central banks in developing robust, resilient, and inclusive digital public infrastructure.
Balancing financial inclusion with financial stability
As central banks encourage the expansion of digital financial services (DFS) and mobile money platforms, they must balance financial inclusion goals with the need to ensure systemic stability. While DPI offers unprecedented opportunities for expanding access to financial services, including to previously unbanked populations, it also introduces new risks into the financial system.
Key Challenges:
Unregulated / Newly regulated providers: Many non-bank financial institutions (NBFIs), such as mobile network operators (MNOs) and FinTechs, now provide digital financial services. This raises questions about how to adapt existing systems to regulate these entities to ensure they uphold financial stability while also supporting innovation.
Over-Reliance on Mobile Money: In countries like Kenya and Uganda, mobile money has become a primary channel for financial transactions. This concentration of financial activity outside the traditional banking sector may pose risks to financial stability, particularly if providers experience operational failures.
Policy Considerations:
Central banks should adopt proportionate regulation that encourages innovation while ensuring systemic resilience. This may include:
Licensing frameworks for NBFIs that align them with the appropriate standards applied to banks for capital adequacy and risk management.
Deposit insurance and consumer protection policies for digital wallets to reduce the risks for users while enhancing trust in digital platforms.
Pakistan, Philippines, and South Africa provide examples of how central banks balanced inclusion and stability, as discussed in CGAP’s (Inclusion- Stability, Integrity, and Protection (I-SIP) framework.
Ensuring consumer protection in the digital finance ecosystem
Consumer protection is a core concern for central banks, particularly as the digitization of financial services expands access to millions of new users, many of whom may lack financial literacy. Without robust consumer protection frameworks, users can be exposed to fraud, unfair pricing practices, or inadequate redress mechanisms.
Key Challenges:
Data Privacy and Security: The use of personal data in digital financial services raises concerns about privacy, security, and potential exploitation.
Financial Literacy: Many new users of digital financial services may not fully understand the risks involved, such as fraud or the loss of funds due to poor transaction security.
Dispute Resolution: Users of digital services often face difficulties in seeking recourse when issues such as transaction errors or fraud occur.
Policy Considerations:
Central banks should prioritize the development of consumer protection frameworks that include:
Disclosure requirements that mandate clear, simple communication about fees, terms, and conditions associated with digital financial services.
The creation of redress mechanisms, such as ombudsman services, that allow consumers to resolve disputes fairly and efficiently.
Mandating security protocols that protect user data from breaches, fraud, and unauthorized access.
The Central Bank of Sierra Leone’s Financial Consumer Protection Guidelines is an example of how regulators can enhance trust in the digital finance ecosystem while expanding access to services.
Cybersecurity and Resilience
As the financial system becomes increasingly digital, cyber threats pose a significant risk to systemic stability. Central banks must ensure that financial institutions and DPI operators have robust cybersecurity frameworks to safeguard sensitive financial data and protect the integrity of financial transactions.
Key Challenges:
Operational Resilience: The failure of digital financial infrastructure due to cyberattacks or operational mishaps can have severe consequences for the financial system.
Digital Crime and Fraud: With the rise of digital payments, cybercrime targeting financial transactions is becoming more prevalent, posing a threat to both users and institutions.
Policy Considerations:
Central banks should work closely with financial institutions to develop cybersecurity frameworks that include:
Risk-based approaches that align cybersecurity investments with the most critical vulnerabilities, such as payment systems and data storage.
Incident response protocols that ensure rapid containment and resolution of cybersecurity breaches.
Coordination with international partners to share best practices and threat intelligence, ensuring that local DPI systems are protected against global cyber threats.
The Bank of Uganda’s cybersecurity guidelines demonstrate how regulatory bodies can take a proactive approach to protect their digital ecosystems.
Promoting interoperability and cross-border integration
In many LDCs, digital financial services are growing in silos, leading to fragmentation that hampers the full potential of DPI. Central banks can play a critical role in promoting the interoperability of payment systems, both domestically and across borders. This integration is essential for fostering regional trade, remittances, and cross-border financial services.
Key Challenges:
Fragmentation of Systems: Lack of interoperability between mobile money providers and banks limits the efficiency and scope of digital financial services.
Cross-Border Payments: The high cost and inefficiency of cross-border payments remain significant barriers to the flow of remittances and trade finance in LDCs.
Policy Considerations:
Central banks should establish regulations that encourage:
Standardization of payment protocols to ensure seamless interoperability between mobile money operators, banks, and other financial institutions.
Regional payment frameworks, such as those being developed by the African Union, to reduce the cost and time of cross-border payments.
Adoption of open APIs that allow new entrants to integrate with existing systems, fostering innovation and improving service delivery.
Encouraging investment in DPI through public-private partnerships
Building and maintaining DPI, such as broadband networks and digital ID systems, requires significant investment. Central banks can support DPI development by creating a regulatory environment that encourages private sector investment while protecting public interests.
Key Challenges:
Financing Infrastructure: The high cost of building broadband networks and other DPI elements can strain public finances in LDCs.
Sustainable Investment Models: Governments often lack the capital needed to develop infrastructure at the required scale .
Policy Considerations:
Central banks can collaborate with other government agencies to:
Promote blended finance models, which use public funds to de-risk private investments in digital infrastructure .
Encourage public-private partnerships (PPPs) that allow private sector players to invest in and operate DPI systems while ensuring affordable and equitable access to digital services .
For instance, countries like Rwanda have successfully leveraged PPPs to expand broadband infrastructure and increase access to digital services in underserved areas.
The Role of the UNCDF Policy Accelerator
In navigating these complex considerations, central banks and financial regulators in LDCs require support that is tailored to their unique contexts. The UNCDF Policy Accelerator offers critical expertise in regulatory frameworks, financial inclusion, and DPI development. By providing targeted technical assistance, convening multi-stakeholder dialogues, and leveraging its expertise in blended finance, the UNCDF is well-positioned to assist central banks in developing robust, resilient, and inclusive digital public infrastructure.
As LDCs continue their digital transformation journeys, central banks will play a pivotal role in ensuring that DPI serves as an inclusive, secure, and sustainable foundation for future growth.