Introduction

Digital currencies, such as Bitcoin and Ethereum, have gained significant momentum worldwide due to their decentralized nature and potential to revolutionize traditional finance. As of 2024, more than 562 million people globally hold some form of cryptocurrency representing 6.8% of global population, reflecting 34% growth in ownership within just one year. The number of crypto ownership exceeding number of MasterCard globally shows the people’s rising interest in digital currencies.

Figure 1. Global Distribution of Cryptocurrency Ownership, 2024 (Source: Triple A Technologies)

Central Banks have also taken notice, with countries like Bahamas, Nigeria and Jamaica completely launching their Central Bank Digital Currencies (CBDCs) and many are in pilot and research stages. As of September 2024, 134 countries and currency unions, representing 98% of the global economy, are exploring CBDC. However, Nepal has taken a more cautious approach. The Government of Nepal has explicitly banned the use of digital currencies since 2017, citing concerns over fraud, money laundering, and the absence of regulatory frameworks.

Figure 2: Number of countries and currency unions exploring CBDC (Source: Atlanticcouncil)

What is the Central Bank Digital Currency (CBDC)?

According to the Bank of International Settlements (BIS), “A CBDC is a digital payment instrument, denominated in the national unit of account that is a direct liability of the central bank”. In simple words, these are digital forms of a country’s national fiat currency issued and regulated by its central bank.  

Figure 3: Illustration of different forms of money (Source : Bjerg(2017))

CBDCs come in two primary categories: retail and wholesale. Retail CBDCs are used by the general public for everyday transactions, which provides direct access to digital money without necessarily needing a bank account. These are designed for use by the general public and can facilitate peer-to-peer (P2P) and business-to-business (B2B) transactions. Retail CBDC can be of two types, account-based with digital identification and token-based for anonymous transactions.

On the other hand, wholesale CBDCs are designed for financial institutions to enhance interbank transfers and securities settlements. Unlike retail CBDCs, wholesale CBDCs are limited to transactions between banks and other financial institutions. It provides the instant settlement of large-value transactions, enhancing the efficiency of payment systems and reducing transaction costs, particularly in cross-border payments.

As of September 2024, 3 of the countries have launched retail CBDC and 35 are in pilot stage while 25 countries are in pilot stage of wholesale CBDC with Kazakhstan yet to decide on one. Both types of CBDCs present opportunities to enhance financial systems but serve different purposes, reflecting the diverse needs of modern economies. 

CBDCs Across Countries

Bahamas: SandDollar

In October 2020, the Bahamas introduced the ‘SandDollar,’ becoming the first-ever country to launch its own CBDC. The main purpose of this initiative was to provide financial inclusion across its diverse islands and fight against money laundering and illegal economic activities. The move followed Hurricane Dorian that struck the Bahamas, using digital currency enabled the government to promptly supply financial relief when bank branches or ATMs were destroyed or inaccessible. As of March, there were about 120,000 active Sand Dollar wallets among a population of over 400,000, indicating a growing adoption rate, especially among tourists who can also use the digital wallet without any KYC requirements for small transactions.

Nigeria: eNaira

Nigeria became the second country to officially launch its centralized digital currency, the 'eNaira,' in October 2021, with the goals of streamlining remittance inflows, improving financial inclusion, and increasing accountability in the informal sector. However, Nigeria has been cautious, imposing limits on payments, which has resulted in the eNaira making up less than 1% of currency circulation as of March 2024. The Central Bank of Nigeria is currently collaborating with the private sector to improve technologies, including a partnership with blockchain firm Gluwa.

China: e-CNY

China’s central bank digital currency (CBDC), the ‘e-CNY’ or digital Yuan, has been in research since 2014, with pilot programs starting in 2019. The e-CNY is so far the largest CBDC pilot with 13.61 billion RMB circulation across 260 million wallets. The People's Bank of China (PBOC) aims to improve financial inclusion and maintain efficient payments in everyday transactions including in public transport and healthcare. 

Figure 4: Total transaction volume of e-CNY by date. (Source: Atlanticcouncil)

PBOC has also been considering the programmable feature of expiring currency in their pilot programs. Despite competition from existing platforms like Alipay and WeChat Pay, e-CNY is being integrated into daily transactions.

Jamaica: JAM-DEX

Jamaica’s CBDC, JAM-DEX, was officially rolled out in 2022 after a successful pilot program with eCurrency Mint in 2021. It was developed to enhance financial inclusion and reduce cash handling cost, with expectations of saving $7 million annually. JAM-DEX enables users to conduct transactions via digital wallets. The Bank of Jamaica (BOJ) introduced initiatives such as merchant incentives and loyalty programs to encourage CBDC adoption. Further efforts are ongoing to promote JAM-DEX in the transportation sector, where taxi drivers have shown strong interest in adopting the digital currency.

Opportunities CBDC Could Bring to Nepal

Support for Remittance

In 2023, Nepal received USD 11 billion in remittances, calculating around 26% of the country’s GDP. Nepal’s economy heavily relies on remittance inflows, acting as a form of social insurance for a developing country like Nepal. However, migrants sending money back to their families face an average transaction fee of 6.35%, according to the World Bank.

The use of CBDC supports cross border transactions which can heavily cut these fees by eliminating the need for intermediaries like payment processors leading to more efficient transfer. Additionally, CBDCs have the potential to create instantaneous transactions. While traditional international payments typically take between one to five days, digital payments using CBDCs could be completed within seconds.

Reduction in Cash Dependency and Transaction Fees

Nepal Rastra Bank (NRB) spends around Rs 400 million annually on printing new notes, with the cost per note ranging from Rs 1.68 to Rs 3.37. 15-20% of these notes become unusable within just four months due to rapid deterioration. While the digital payment market is projected to be 6105 million USD in 2028 with an annual growth rate of 13.95%, ConnectIPS charges NRs. 2-8, and Fonepay charges NPR 10 per transaction. In papers, the government is promoting digital transactions to reduce dependencies in cash. Ironically, the 13% VAT imposed on these digital transaction fees by the former finance minister in the 2081/82 budget speech makes cashless transactions more expensive for citizens. This would certainly force them to revert to using cash.

CBDCs would significantly reduce the costs of printing and handling cash and vouchers as well as cut down transaction charges by facilitating peer-to-peer transfer. As of 2024, no countries that have launched or are in the pilot stage of CBDCs have been reported to charge any fees for CBDC transactions. Subsequently, Nepal’s e-commerce sector which is projected to reach $1.24 billion by 2028 would significantly benefit from this efficient digital payment accelerating the growth of the digital economy.

Enhanced Financial Inclusion

As of January 2023, approximately 42.78 million mobile phones were active in Nepal, equating to 139.2% of the total population. While there has been an exponential increase in the internet penetration rate over the last decade, one-third of the population is still deprived of bank accounts and formal financial services.

Figure 5: Exponential increase in internet penetration rate in Nepal (Source: WorldBank)

However, the broadband penetration rate of 149.23% ensures that even those without bank accounts have access to the internet and can participate digitally, especially as 91.72% of internet users rely on mobile devices. This widespread digital connectivity positions CBDCs as a key tool to enhance financial inclusion by bridging financial gaps and providing secure, low-cost services.

Security and Fraud Prevention

The global cost of cybercrime is expected to reach $10.5 trillion annually by 2025. In this context, Nepal has seen a six-fold surge in cybercrime over the past five years, with 12,789 cybercrime-related cases reported by March 2024, many involving financial fraud like phishing, banking fraud, and online shopping scams.

Meanwhile, with use of distributed ledger or blockchain technology, CBDCs provide transparent, traceable, and immutable transactions, reducing the risk of fraud. With real-time monitoring and multi-layered encryption, CBDCs can further enhance security over traditional systems.

Improved Monetary Policy Implementation

CBDC can be a new toolset for NRB to implement their monetary policy more effectively. NRB can directly influence the money supply by controlling currency distribution and adjusting interest rates on digital holdings. For example, negative interest rates can be applied directly to CBDC accounts to stimulate spending during deflationary periods.

CBDCs also facilitate real-time data collection for more accurate economic insights, while programmable payment features allow funds to be supplied for specific purposes, such as G2P relief payments during crises, social allowances for underprivileged groups, and other condition-based payments, quickly bypassing intermediaries and ensuring accountability.

The feature of programmable money, such as expiring digital currency, if applied, encourages spending, which promotes economic activity. Furthermore, CBDCs streamline interbank settlements, improving liquidity management and reducing the cost of cross-border transactions.

Challenges in Adoption: Infrastructure and Economic Barriers

Although Nepal is witnessing a significant increase in internet penetration, stark disparities exist between urban and rural areas as well as between income groups. Many rural regions lack reliable electricity and internet, with about 66% of households having limited or no access to internet services. This issue is compounded during extreme weather events, which often result in electricity and network outages for days. These infrastructure issues could challenge the adoption of CBDC, especially in remote areas where basic services remain inconsistent.

 

 

Figure 6: Percentage of households in Nepal with access to internet at home (Source: UNICEF)

Nepal ranks 119th  and 152nd  in the UN’s E-Government Development and E-Participation Indexes, respectively, indicating gaps in digital infrastructure. The Internet Connectivity Index 2021 revealed that the average monthly internet fee is $13.8, making access unaffordable for the 20.3% of the population living below the poverty line. 

Figure 7: Province-wise financial literacy score (Source: Thehrmnepal)

Additionally, Nepal's financial literacy score of 57.9% is below the OECD average, which could hinder the widespread understanding and adoption of Central Bank Digital Currency (CBDC). The irreversibility nature of blockchain technology, where transactions cannot be canceled or reversed even by authorities, may present significant challenges for the commons. These existing issues of insufficient financial and digital literacy create a lack of trust and acceptance among consumers regarding online payments and data security. Nepal’s history has always shown reluctance in adapting to new technologies and innovation, for example, hesitations in adopting open-source technologies and ride-sharing platforms like Tootle and Pathao facing legal challenges. 

Moreover, government websites have experienced several instances of cyberattacks, including a single-day attack on over 400 government websites, Turkish hackers’ attack on the official website of the Department of Passport, and an attack on the Singha Durbar server, raising a big question over government’s cyber strength and data protection.

With no regulatory framework for digital currencies yet, implementing CBDC will involve creating complex regulations, including anti-money laundering (AML) and know-your-customer (KYC) protocols. Mismanagement of CBDCs can also lead to monetary policy challenges, such as inflation or loss of central bank control. Proper regulation will require significant time and careful planning.

Legal Status: Digital Currency And CBDC in Nepal

In Nepal, any kind of digital currency including Bitcoin is currently banned. The Nepal Rastra Bank (NRB) declared Bitcoin ( in 2017) and any other unauthorized payment system ( in 2019) illegal through public notices, reinforced under the Nepal Rastra Bank Act, 2058 and Foreign Exchange Regulation Act, 2019. Besides these, NRB further issued notices in 2021, 2022, and 2023 which prohibit transactions, use, and mining of any kind of virtual currencies. Non-compliance with these notices has resulted in several instances of arrests and punishments.

Figure 8: Nepal Rastra Bank’s notice declaring cryptocurrencies illegal in Nepal (Source: NRB)

The central bank’s stance on digital currencies is primarily driven by concerns over fraud, money laundering, and terrorism financing. In a report, the NRB pointed out the risks associated with the unregulated nature of digital currencies, stating that their anonymity could be exploited for illegal activities such as tax evasion and the financing of criminal enterprises. Moreover, the Financial Action Task Force (FATF) has red-flagged the potential for virtual assets to be used in money laundering and terrorist financing which raises alarms for countries like Nepal.

Despite the complete ban on Cryptocurrencies, Nepal is open to the idea of Central Bank Digital Currencies (CBDCs), following global trends. The 2021-22 monetary policy announced a feasibility study for implementing a CBDC in Nepal. By 2023, a preliminary study draft had been prepared, and according to the 2024-25 monetary policy, a separate Central Bank Digital Currency Division was established under the Payment Systems Department.

At the 2024 South Asian BFSI Tech Summit, NRB Governor, Maha Prasad Adhikari, announced that full rollout of a Central Bank Digital Currency (CBDC) is expected by 2026. The Nepal Rastra Bank (NRB) plans to launch its CBDC in five stages: establishing a dedicated division, conducting comprehensive research, forming partnerships and collaboration, legal arrangements and piloting, and finally, the full rollout. However, progress is slow, with only the first stage completed so far, suggesting the progress may take longer than expected.

Conclusions

While global interest in digital currencies is rising, Nepal’s slow progress on Central Bank Digital Currency (CBDC) risks economic stagnation. Cryptocurrencies like Bitcoin pose a threat of criminal exploitation, and the ban on them is intelligible. However, CBDCs, being regulated by central banks, offer a safer alternative.

The government’s focus on banning cryptocurrencies overlooks the urgency of developing a well-regulated CBDC. Careful planning is necessary, backed by speedy research with additional investment and resources. Nepal must swiftly address its susceptible cyber infrastructure and data protection strategies.

Further, Nepal's tax policies on digital transactions—such as VAT on digital payments—are counterproductive to the goal of a digital economy and potentially be a barrier to the successful CBDC rollout. Public awareness campaigns about CBDCs are critical, especially to improve financial literacy in rural areas. By investing in education, the government can build trust and understanding among the people before a rollout. Furthermore, by leveraging global research and experiments, Nepal can avoid the mistakes of other nations and accelerate its transition. If it is delayed any further, the country risks missing out on long-term financial benefits and falling behind globally. Nepal must move quickly to ensure economic growth and stability.