World Economic Forum makes case for CBDCs, Australia latest to test tech

The World Economic Forum, a non-governmental lobby best known for its annual Davos conference for business and political leaders, has published a blog post to examine the potential pros and cons of central bank digital currencies (CBDC ). The bulk of the post is about benefits.

“Money is no longer paper and coins; it’s increasingly digital,” the post begins, then sets out the three main benefits of CBDCs: reducing poverty, fighting economic crime, and strengthening financial systems.

Citing research from the US think tank Atlantic Council, the WEF says CBDCs – similar to cryptocurrency, but issued and backed by a central bank – could reduce global poverty by opening up financial services to the estimated 1.7 billion. of “unbanked” adults in the world.

Serving the unbanked was a reason given by El Salvador for introducing a digital currency in September 2021 – although it embraced Bitcoin and not a CBDC. Requiring only a mobile device, cryptocurrency has a lower barrier of entry than financial institutions that require IDs, proof of residency, and other documents.

The WEF – which brought together 2,000 attendees at its gathering in Switzerland in May this year, including more than 600 CEOs, as well as Bill Gates and other billionaires – says CBDCs can reduce money laundering and corruption. other financial crimes. As with cryptocurrency, all transactions in a CBDC are recorded on the blockchain, providing more transparency in money flows.

The WEF message added that CBDCs could strengthen financial systems in times of emergency, such as natural disasters, citing research from the International Monetary Fund.

In contrast, the WEF said counterfeiting, theft and failure of the CBDC’s network could have “more catastrophic consequences” than they would with cash, citing its own research.

He also warned of the potential of technology to worsen financial inclusion if not properly implemented and that in countries where the public lacks trust in financial institutions, technology may not win. support. The WEF pointed out that Ecuador canceled a CBDC project three years after it started in 2017 due to lack of public trust.

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, e-CNY, is arguably the most advanced among major economies and is set to officially start in 2023. The pilot project saw 83 billion yuan ($12 billion) in transactions in the first five month of 2022, up 87.565 billion yuan for the whole year of 2021.

Nigeria and Jamaica launched 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 because it is guaranteed by the state and it aims to introduce a digital euro in its 27 member states by the middle of the decade. The WEF quotes the US Federal Reserve saying that a CBDC would be “the most secure digital asset available to the general public, with no associated credit or liquidity risk.”

Not everyone shares these views.

Although the language of CBDCs may mirror that of cryptocurrencies such as Bitcoin or Ethereum, they fundamentally deviate from each other in terms of decentralization and financial freedom, said Ben Caselin, head of research and strategy. to the Seychelles-based crypto exchange AAX Ltd Inc.

A central bank-backed digital currency may be quite benign in a relatively open jurisdiction, such as the US or the EU, but the opportunity it offers for greater government oversight and financial interference in less liberal economies is a matter of concern, he said in a Forkast interview.

“If we want to build towards a more unified and financially inclusive world, it is far better to adopt a non-sovereign currency that is not controlled by an unelected entity such as a central bank – or even the World Economic Forum” , did he declare.

Use case

Australia is one of the latest countries to explore real-world use cases for CBDCs.

On August 9, the Reserve Bank of Australia (RBA) announced that it was partnering with the government-backed Digital Finance Cooperative Research Center (DFCRC) to explore the technology. While considerable research has been done on 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 matter of technological feasibility,” Andreas Furche, CEO of DFCRC, said in the statement. “The key research questions now are what economic benefits a CBDC might enable and how it might be designed to maximize those benefits.”

The project is expected to last around a year and will involve the development of 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 is supported by the Australian Treasury, which runs what it calls “token mapping” to assess each cryptocurrency by type, technology and use case to better design regulations. The Treasury is expected to publish an interim report on its findings in a few months.

Melvin B. Baillie