The World Economic Forum (WEF) has issued a ‘Policy-Maker Toolkit’ to assist governments in creating their own central bank digital currencies (CBDCs).
The report – published by the Centre for the Fourth Industrial Revolution, part of the Geneva-based WEF – describes CBDCs as a “digitised version of sovereign currency”.
Offering a more comprehensive definition of CBDCs, the WEF report reads:
“CBDCs are a new form of digitised sovereign currency, generally conceived to be equal to physical cash or reserves held at the central bank. It is central bank money, or a component of the monetary base and a direct liability of the central bank.”
The report contrasts several different types of CBDC, including “Retail CBDCs”, for use by members of the public; “Wholesale CBDCs”, which can be issued to commercial banks for interbank payments; and “Cross-border CBDCs”, which can be used by any party for borderless payments.
Discussing the opportunities for issuers, the WEF claims that CBDCs could offer significant improvements to the efficiency and speed of cross-border interbank payments and reduce settlement times.
Researchers explain:
“…[CBDCs] have risen to prominence as a policy and operational consideration for central banks, ministries of finance, and other institutions because of its potential to address both long‑standing and new challenges such as financial inclusion and payment‑system stability.”
The WEF toolkit guides issuers through the CBDC creation process, identifying risks and decisions that central banks will have to be mindful of when issuing a CBDC.
Risks include regulatory compliance, reduction of bank profits through disintermediation, and reduced lending activity.
The growth of CBDCs
The blockchain industry’s focus has been firmly fixed on China for CBDC development after the country issued a statement last year claiming its digital yuan project was “progressing smoothly“, with some claiming that the CBDC may arrive sometime this year.
China’s quick adoption of new CBDC technology has led the USA to explore issuing a digital dollar, and the European Central Bank has also considered launching a pan-European CBDC for the euro.
Many experts have predicted that the first widely used CBDC could be instrumental in achieving international use as a reserve currency, with some comparing it to a new space-race.
However, other countries are not so certain that CBDCs will be a useful means of exchange. In December 2019, the governor of the Bank of Japan claimed that there was “no demand” for a digital yen in its cash-based society.
Earlier this week, the Bank of England announced it will team up with a number of leading central banks from across the globe to discuss the potential of launching a central bank digital currency.
You can read more about CBDCs here.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.