What are central bank digital currencies (CBDCs)? was the title of a blog post written by the World Economic Forum (WEF) on August 31 in response to the Reserve Bank of Australia’s (RBA) intention to launch a CBDC pilot project.
The central bank of Australia, The Reserve Bank of Australia (RBA), revealed in a statement on August 9 that it will work with the Digital Finance Cooperative Research Centre (DFCRC) on a year-long research project to examine the “innovative use cases and business models” of introducing a CBDC in Australia.
In the blog post, WEF restates the European Central Bank’s (ECB) definition of CBDCs, which identifies them as a form of state-guaranteed, risk-free currency. It also predicts that by the middle of the decade, every European state will have its own digital version of the euro in circulation.
The blog post goes on to clarify that CBDC is a secure asset since it lacks the dangers and volatility that come with cryptocurrencies. CBDCs can be kept by both private individuals and corporate entities at the central bank, as well as on mobile devices, prepaid cards, and other types of digital wallets as electronic tokens.
The virtual money would then be promoted as a quicker, simpler, and more secure method of making daily payments. According to WEF, this makes CBDC an addition to actual cash rather than a substitute.
Regarding the advantages of CBDC for society as a whole, WEF noted that CBDC may reduce poverty and boost financial inclusion by facilitating safer and simpler access to money. In the event that cash is in short supply or becomes unavailable, it may also increase the resilience of financial systems since CBDC can act as a backup because it can be redeemed for domestic currencies. Also motivating is the possibility of employing DLT to combat financial crime, as CBDCs can pave the path for enhanced AML/ KYC functionality and transparency of fund flows.
According to the WEF’s Central Bank Digital Currency Policy-Maker Toolkit, other central banks besides the RBA are also investigating the usage of CBDC and distributed ledger technologies. Retail CBDC, for peer-to-peer payments and payments from customers to businesses, or wholesale CBDC, for commercial banks and clearing houses to use in order to facilitate more effective interbank payments that take place outside of conventional correspondent and other payment systems, are two of the most popular use cases.
Currently, WEF is assisting central banks with the development, testing, and implementation of their DLT and CBDC adoption policies. It underlined the need to consider input from all sectors when making decisions about how to use the relatively new technology, as well as any potential threats they might pose.
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