If there is any concept we will likely be seeing a lot of in the future, it is central bank-issued digital currencies. This is because as the benefits of cryptocurrency have been displayed prominently in the private sector, many world governments have seen the benefit as well and are looking to issue their own. The most prominent of these is China who intends to release its own national digital token this year as well as other countries such as the Bahamas and the British virgin islands. With these developments in place, more policies will have to be developed in order to facilitate the growing demand for Central Bank digital currencies.
In response to this, the World Economic Forum, in collaboration with a number of central banks around the world, has developed a new policymaker toolkit for the development of Central Bank digital currencies.
The official announcement was made on January 22, 2020, and according to the statement, the toolkit was developed to help Central Bank executives determine whether the release of a central bank digital currency will be beneficial to them and how to go about it. To develop the toolkit, input was given from Central Bank executives, regulators research and experts from over 40 institutions.
“Given the critical roles central banks play in the global economy, any central bank digital currency implementation, including potentially with blockchain technology, will have a profound impact domestically and internationally. […] It is imperative that central banks proceed cautiously, with a rigorous analysis of the opportunities and challenges posed,” said the head of blockchain and distributed ledger technology (DLT) at the World Economic Forum Sheila Warren.
The paper acknowledges several benefits of a central bank-issued token such as speed and reducing cost in terms of cross-border transactions, easy traceability and so on. It also mentions that other solutions should be looked into before a central bank digital currency is considered by a nation. Mention is also made of the various risks that are associated with digital currencies which must be taken into consideration.
“Generates substantial financial risks, including: 1) bank disintermediation risk, which could reduce bank profits and lending activity; 2) digital‐bank‐run risk as depositors may rapidly convert commercial bank deposits to CBDC,” the toolkit says.