CBDCs are the future of central bank money, but they are not ready yet

A World Economic Forum (WEF) panel of global central banks and technology providers has touted central bank digital currencies (CBDCs) as the future of central bank money, pitching them as one of the solutions to constraints in the payments industry today. However, they also stated that these currencies have several limitations that still need to be addressed.

The WEF panel explains the benefits of CBDCs

A working group on central bank digital currencies, organized as part of the World Economic Forum (WEF) meetings in Davos, has emphasized that it expects a lot from central bank digital currencies (CBDCs) in the framework of the future of central bank money.

The panel, made up of central bankers such as Julio Velarde, Governor of the Central Bank of Peru, Lesetja Kganyago, Governor of the South African Reserve Bank, and Amir Yaron,
The Governor of the Central Bank of Israel noted several supposed benefits that these new financial tools could provide, but also highlighted the difficulties in implementing them effectively.

Governor Velarde explained that, in his opinion, CBDCs present themselves as a solution for payments and credit that goes beyond banking integration. For him, the involvement of central banks in the creation of these tools is linked to setting standards and bringing private banks into the loop, while providing financial inclusion to people still outside the traditional banking system. On this subject, he said:

We have learned the hard way that the revolution must come from the central banks. We don’t know how the CBDCs will be implemented… but we are closely following what is happening around the world.

Governor Amir Yaron explained that payments are now part of the front line of financial markets and that is why central banks are currently looking into it. For Yaron, CBDCs could act as a bridge between the digital world and private banking institutions. He stated:

We’re seeing faster payments, smart contracts, e-money, cryptoassets and stablecoins, and CBDC is a public good that can be complementary but can also displace some of these things. CBDC could be the bridge between the new digital economy and the standard economy.

Israel has experimented with CBDCs. Their central bank is part of the Icebreaker project, which involved a CBDC-based cross-border payment between Israel, Norway and Sweden in collaboration with the Bank for International Settlements (BIS).

A smarter solution with caveats

For Governor Kganyago, one of the main challenges for more than 100 banks around the world studying CBDCs is to bridge the digital divide involving new types of money, such as cryptocurrencies, which are currently emerging as an alternative to the currency issued by central banks. , and to modernize payment systems.

In that sense, he believes that the environment is changing and that some central banks think they have to change with it and offer these digital alternatives. For Kganyago, there ultimately needs to be a national discussion about demand, with the big questions having to do with public elections rather than CBDC use.

He concluded by explaining that the issues of implementing CBDCs for domestic and cross-border payments will be more on the regulatory side than on the technological side, as they will have to comply with the rules of multiple jurisdictions around the world.

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