The Cost of Cash Processing as a Determinant of the Central Bank Digital Currency: A Critical Analysis of The Zambian Case

Abstract

This paper focuses on evaluating the Cost of Cash processing as a determinant of Central Bank Digital Currency (CBDC) in Zambia. The study adopted a two-tier CBDC model which used the methodology of time series monthly data to ascertain if the introduction of a CBDC could reduce the cost of processing currency and mitigate the high cost of processing cash in circulation (CIC). The statistical tests adopted the use of ordinary least squares (OLS) regression that werwasnducted at level and at first difference to stabilize the time series and to avoid spurious results. The preliminary empirical results depicted the existence of a nonnonsignificantlationship between a CBDC and the cost of cash in the Zambian jurisdiction. The relationship between CBDC and the high cost of processing currency was found to be insignificant and this was partially due to the fact that the two-tier CBDC model used was a hybrid model and assumed that CBDC would be used in parallel with fiat currency and all the requirements of processing currency remained unchanged.

Keywords: Central Bank Digital Currencies (CBDC), Cash in Circulation (CIC), Cost of Currency, Two-tier, Zambia

DOI: 10.7176/JESD/13-16-01

Publication date:August 31^st 2022