Weighing the pros and cons, the World Economic Forum creates a CBDC policy maker toolkit

Cointelegraph reported on January 23 that the World Economic Forum (WEF) and some major central banks in the world have jointly created a CBDC (Central Bank Digital Currency) policy maker toolkit.

World Economic Forum 2017 (Image source: flickr )

According to a statement issued by the World Economic Forum on January 22, the toolkit is an attempt by the World Economic Forum to help decision makers understand and guide their deployment of CBDC.

The World Economic Forum has developed this framework in cooperation with regulators, central bank researchers, experts from international organizations and more than 40 institutions. Sheila Warrren, head of blockchain and distributed ledger technology (DLT) at the World Economic Forum, said:

Given the central bank's key role in the global economy, the implementation of any digital currency, including the use of blockchain technology, by the central bank will have a profound impact at home and abroad. Central banks must act cautiously and strictly analyze the opportunities and challenges they bring.

Thai Bank President Veerathai Santiprabhob said the agency has made good progress in implementing its CBDC project. In addition, there have been recent reports that the central banks of Hong Kong and Thailand will jointly implement the CBDC for cross-border payments. When it comes to how the toolkit released by the World Economic Forum can contribute to the sustainable development of digital currencies, he said:

In our experience, we need to identify the benefits of CBDC use cases and weigh their associated risks across different dimensions. Therefore, the decision maker toolkit can effectively provide an operational framework for CBDC deployment.

Bahrain's central bank governor Rasheed M. Al Maraj said that his agency would launch a pilot project based on the World Economic Forum toolkit, saying:

We hope that this will be an opportunity to learn, grow and adapt to the changes of the Fourth Industrial Revolution.

Pros and cons of CBDC

The framework states that CBDC can improve the cost and speed of cross-border interbank payments and reduce settlement and counterparty risk. In addition, the World Economic Forum pointed out that compared with physical currencies, digital currencies can also enhance the transmission and reporting of financial data and improve traceability. Countries should consider other economic friction solutions before considering establishing a CBDC. Digital currencies may not increase the value of domestic interbank payments, as domestic interbank payments have formed an effective system.

The framework also shows that to implement digital currencies, countries also need to invest heavily in cybersecurity and system resilience, and potential risks will follow:

This has the potential to generate significant financial risks, including: the risk of bank disintermediation, which may reduce bank profits and loan activities; and the risk of digital-bank-operation, as depositors may quickly convert commercial bank deposits into CBDC.

Policy maker toolkit distinguishes between different types of CBDC

The World Economic Forum's framework divides CBDC into three categories: retail, wholesale, and hybrid. The first type of CBDC allows non-financial users to hold digital currency accounts. The second type is an electronic system that allows users to use central bank reserves. Commercial banks and other financial institutions can use this system for interbank and securities transactions.

Hybrid CBDC allows financial institutions that do not have access to central bank deposit instruments to hold reserves. The World Economic Forum says this will strengthen the protection and oversight of these organizations and improve interoperability between different payment systems.

The document states that if the issued CBDC is based on distributed ledger technology, then the central bank has full control over the issuance of digital currencies:

The central bank can delegate transaction approval to a more decentralized network, most likely those composed of regulated financial institutions. Transaction approval can follow a pre-designated consensus process by the central bank, which may include central bank privileges, such as transaction "veto power" or visibility. The central bank can also develop a distributed ledger system, which is still the only verification node, but can benefit from other advantages related to the distributed ledger.

Impact of stablecoin on CBDC development

At present, the work and discussion around the development of CBDC is becoming more and more common around the world. Many people believe that "stable coins", especially Facebook's "Libra", have sounded the alarm bell for central banks and made them realize that in the digital age, the public is looking for cheap, instant digital payments.

Earlier this month, European Central Bank (ECB) President Christine Lagarde also stated that she supported the European Central Bank's active participation in the development of the CBDC to meet faster and cheaper cross-border payments.