Global Leaders Discuss CBDC Framework At World Economic Forum 2020

Last week at the World Economic Forum 2020, global leaders gathered to discuss multiple issues concerning global economy and other things. One of the most important discussions this year was the use of the blockchain technology and digital currencies in making payment systems efficient.

In collaboration with some of the world’s major central banks, the WEF has released a new central bank digital currency (CBDC) toolkit which will help policymakers understand if deploying CBDC can be advantageous while masking other risks.

The WEF said that the toolkit is designed by experts from 40 different global financial institutions including central bank researchers, regulators, and other international organizations.

Sheila Warren, the head of blockchain & distributed ledger technology at WEF said: “Given the critical roles central banks play in the global economy, any central bank digital currency implementation, including potentially with blockchain technology, will have a profound impact domestically and internationally. [...] It is imperative that central banks proceed cautiously, with a rigorous analysis of the opportunities and challenges posed.”

We already know that a number of Asian countries like China, Thailand, Bahrain, and others have already started experimenting with their CBDCs. Bank of Thailand Governor Veerathai Santiprabhob said that they have made good progress so far in developing CBDCs.

Thailand is currently working with Hong-Kong in developing a joint CBDC for faster cross-border payments. The governor added that the WEF toolkit will help them immensely in further development.

“From our experience, we need to identify tradeoffs between benefits from the use cases and their associated risks across different dimensions. This is where the Policymaker Toolkit could usefully provide an actionable framework for CBDC deployment,” said the governor.

The framework released by WEF weighs both - the pros and the cons - of having a CBDC. It notes that CBDC can improve the overall efficiency of cross-border interbank payments while simultaneously taking care of settlement and counterparts risks.

Besides, WEF says that CBDCs can improve the traceability to physical cash and make financial data reporting more efficient. However, the framework also mentions the cons along with its benefits.

For e.g. it states that CBDC may not add much value in domestic interbank payments over the existing systems. The framework also notes other risks like:

“Generates substantial financial risks, including: 1) bank disintermediation risk, which could reduce bank profits and lending activity; 2) digital‐bank‐run risk as depositors may rapidly convert commercial bank deposits to CBDC.”

The WEF talks of dividing the CBDCs in three different categories like retail, hybrid and wholesale. The retail CBDCs will be for non-financial users for holding digital currency accounts while the wholesale CBDCs will be for granting access to central bank’s reserves which can be used by other regulated financial institutions and commercial banks.

The participation of WEF leaders in the digital currency industry hints at major upcoming transformation in the global payments solutions.