The World Economic Forum, a non-governmental lobby best known for its annual Davos conference for business and political leaders, has released a blog post to examine the potential benefits and drawbacks of central bank digital currencies (CBDCs). The bulk of the post is on the benefits.
“Money isn’t paper and coins anymore; it’s increasingly digital,” the post begins and then lays out three main benefits of CBDCs: reducing poverty, tackling economic crime and strengthening financial systems.
Citing research by U.S. think-tank the Atlantic Council, the WEF argues that CBDCs – akin to cryptocurrency, but issued and backed by a central bank – could alleviate global poverty by opening financial services to the world’s estimated 1.7 billion “unbanked” adults.
Serving the unbanked was a reason El Salvador gave for introducing a digital currency in September 2021 – though it adopted Bitcoin not a CBDC . Requiring only a mobile device, cryptocurrency has a lower barrier of entry than financial institutions that require identity documents, proof of residence and other documentation.
The WEF – which had 2,000 attendees at its gathering in Switzerland in May this year, including more than 600 chief executive officers, along with Bill Gates and other billionaires – says CBDCs can reduce money laundering and other financial crimes. As with cryptocurrency, all transactions in a CBDC are recorded on the blockchain, providing more transparency in money flows.
The WEF post added that CBDCs could strengthen financial systems in emergencies, such as natural disasters, citing research by the International Monetary Fund.
On the downside, WEF said CBDC counterfeiting, theft and network failure could have “more catastrophic consequences” than they would with cash, quoting its own research.
It also warned of the potential for the technology to worsen financial inclusion if not properly implemented and that in countries with a lack of public trust in financial institutions, the technology may fail to win support. The WEF highlighted Ecuador canceling a CBDC project three years after it launched in 2017 due to lack of public confidence.
On board?
According to the Atlantic Council’s Central Bank Digital Currency Tracker, 112 countries have a CBDC project at some stage of development.
China’s CBDC project, the e-CNY, is arguably the most advanced among major economies and is due to officially start in 2023. The pilot project recorded 83 billion yuan (US$12 billion) worth of transactions in the first five months of 2022, up from 87.565 billion yuan in all of 2021.
Nigeria and Jamaica have begun their own projects, while the Bahamas “Sand Dollar” project was the first CBDC to launch in 2020.
The European Central Bank argues that central bank money is risk-free as it is guaranteed by the state and it aims to introduce a digital Euro across its 27 member states by mid-decade. The WEF cites the U.S. Federal Reserve saying a CBDC would be “the safest digital asset available to the general public, with no associated credit or liquidity risk.”
Not everyone shares those views.
While the language of CBDCs may mirror that of cryptocurrencies such as Bitcoin or Ethereum, they depart fundamentally from each other in terms of decentralization and financial freedom, said Ben Caselin, head of research and strategy at Seychelles-headquartered crypto exchange AAX Ltd Inc.
A central bank-backed digital currency may be quite benign in a relatively open jurisdiction, such as the U.S. or EU, but the opportunity they afford for greater government surveillance and financial interference in less liberal economies is a point of concern, he said in a Forkast interview.
“If we want to build towards a more unified, financially inclusive world, it’s much better to adopt non-sovereign money that is not controlled by an unelected entity such as a central bank — or even the World Economic Forum,” he said.
Use cases
Australia is among the latest countries to explore actual use cases for CBDCs.
On Aug. 9 the Reserve Bank of Australia (RBA) said it was partnering with government-backed Digital Finance Cooperative Research Centre (DFCRC) to explore the technology. While considerable research has gone into the technical aspects of CBDCs, less has been done to explore their economic benefits, the RBA said in a press release.
“CBDC is no longer a question of technological feasibility,” said Andreas Furche, chief executive officer of the DFCRC, in the statement. “The key research questions now are what economic benefits a CBDC could enable, and how it could be designed to maximize those benefits.”
The project is expected to take roughly a year and will involve developing a CBDC pilot. Industry participants will be invited to develop their own use cases, from which the RBA will select to participate in the trial based on their potential.
The project has the support of the Australian Treasury, which is running what it calls “token mapping” to assess each cryptocurrency by type, technology and use cases to better design regulations. The Treasury is expected to release an interim report on its findings in a few months.