Central bank digital currencies, which are issued and regulated by governments, can serve unbanked and under-banked populations. They can allow people in remote areas to make cross-border payments by combining the safety, security, privacy, and low cost of cash with the ability to be used online without needing a bank account. And they are backed by governments, so they carry less risk than some other digital currencies, such as Bitcoin or Ether, which are privately issued.

This is why many developing countries are examining their use with hopes of increasing the availability of efficient and low-cost transactions, improved cross-border payments, greater access to the financial system, and increased economic growth. And, importantly, to facilitate innovation and the possibility of delivering offline access, which is needed with the increasing frequency and severity of disasters triggered by natural hazards, and in areas with limited or unreliable access to electricity and internet connectivity.

This is being weighed against the limitations of available digital infrastructure and the capacity to manage risks that can impact financial stability, financial integrity, data protection and privacy.

To better understand what is required to replace paper currency with a central bank digital currency, collaboration and sharing of best practices is needed for a structured and consistent approach. With remittances integral to many developing countries, existing challenges and barriers, including lack of competition, high cost, delays, access, transparency, and safety, need to be addressed.

Inconsistencies between regulatory frameworks across jurisdictions will also need to be resolved. This includes aligning regulatory, supervisory, and oversight frameworks for cross-border payments, anti-money laundering/combating the financing of terrorism (AML/CFT), payment versus payment adoption, administration of foreign exchange, and data and privacy protection.

Using established messaging standards, data, technical standards, and technical interfaces to communicate with other systems can also help. This will enable domestic interoperability, ensure systems can coexist with other national payment systems, and achieve an easy flow of funds to and from other payment systems and arrangements.

Success will require input, engagement, and support from government bodies, end users, financial institutions, technology and infrastructure providers, academia, and standards development organizations.

Incorporating central bank digital currencies in national payment system strategies or digital transformation strategies can also provide central banks with a framework to evaluate infrastructure readiness, e-commerce penetration, mobile-money penetration, and regulation; and plan and prepare for a potential central bank digital currency implemented nationally or by trading partners.

With about 1 billion individuals globally having no way to prove their identity, some developing markets will need to focus on addressing fundamentals, such as ensuring individuals have a legal means to prove their identity, governments have established identity verification regulations and standards, and financial institutions have access to verification and authentication services.

This is because regulators require verification of a person's identity through know-your-customer checks before delivering financial services for anti-money laundering and fraud-reduction purposes.

Success will require input, engagement, and support from government bodies, end users, financial institutions, technology and infrastructure providers, academia, and standards development organizations.

While a central bank digital currency can facilitate faster instantaneous settlement of cross-border payments, a potential trade-off of efficiency can increase imports of cheaper goods that can compete with domestic industries. Central banks must review the appropriate guidelines to ensure that growing cross-border payments will not adversely affect the current account balance.

Countries could also consider establishing a corridor risk assessment promoting a safe remittance corridor, a measure aimed at simplifying money laundering prevention measures in lower-risk transactions. If the overall risk level in the corridor is lower, it can be treated as a safe remittance corridor, be subject to simplified customer due diligence measures, support poverty alleviation, and minimize money laundering and terror financing risks.

A critical question is whether wholesale or general-purpose central bank digital currency will be most appropriate to explore further. Both benefits and risks must be reviewed and evaluated against individual country circumstances to optimize central bank resources and enable a targeted and precise analysis.

Although wholesale and general-purpose central bank digital currencies can be implemented simultaneously, for many developing countries, general-purpose central bank digital currencies may be the preferred initial option, followed by cross-border central bank digital currencies. Such an approach would reduce complexity and dependency on other jurisdictions' digital infrastructure readiness and availability.

Initiating a proof-of-concept within a regulatory sandbox can help ensure a measured, staged approach to evaluate the merits of the prioritized central bank digital currencies use case; assess critical factors, such as participants' readiness, costs, regulations, policy gaps, and timeline; and plan for mitigating risks, such as the possibility of economic disruption, and infrastructure and resource capabilities.

To expand access to the financial system, it will also be essential to leverage technological advances and educational material to overcome the potential technical and economic barriers to using central bank digital currencies that may disproportionately harm or disadvantage financially underserved communities.

Central bank digital currencies will need to support payments to and from the public sector and equity-advancing initiatives, such as social safety net programs; expand equitable access to deposit and payment products and services and credit provided by banks and other sources; and ensure interoperability with digital identification. This includes expanding access to people without access to devices or reliable Internet access and individuals with cognitive, motor, or sensory impairments or disabilities.

It is time for central banks also in developing countries to explore and better understand central bank digital currencies in their continued efforts to follow global best practices as the economies become increasingly digitized. Remote and sparsely populated countries can potentially benefit from government-backed digital currencies to leap-frog the limitations of traditional currencies, get more people into financial systems and overcome challenges in cross-border payments.