As many as 98% of Central Banks are Reviewing CBDCs, According to WEF

Bittime - CBDC (Central Bank Digital Currencies) is attracting the attention of many parties involved in the financial world.

The potential offered and the various controversies that accompany CBDC are currently in the spotlight of the WEF (World Economic Forum).

According to the WEF, currently at least 98% of Central Banks are reviewing CBDC. What next? Read the following article to the end.

WEF report on CBDC

The World Economic Forum (WEF) has released a report discussing wholesale central bank digital assets (wCBDC).

The document entitled “Modernizing Financial Markets with Wholesale Central Bank Digital Currency (wCBDC)” explores ongoing initiatives, use case studies in financial markets, as well as potential ways wCBDC can address key pain points and challenges in the industry.

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According to the WEF, more than 98% of central banks worldwide are researching, piloting, or implementing central bank digital currencies (CBDC). 

There is a huge opportunity to leverage innovation in this form of central bank money to improve systemically crucial payment systems and securities transactions between financial institutions.

The WEF stated that the report aims to improve the efficiency, security and inclusiveness of the financial system, paving the way for a more resilient global economy.

According to the report, it is also explained that CeBM is an ideal solution for systemically crucial transactions even though there are developing alternative payment instruments. 

Wholesale central bank digital currencies (wCBDCs) are a form of CeBM that could open up new economic models and integrations that are not possible today.

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CBDC: Inter-Bank Operation Efficiency with CeBM

The report states that CeBM is an excellent choice for interbank payments and securities transactions due to several key characteristics. 

First, CeBM eliminates credit and liquidity risks, in line with Financial Market Infrastructure Principles (PFMI) recommendations for critical transactions. This reduces the possibility of financial instability that can arise from these sectors.

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Second, CeBM facilitates the final settlement of transactions. Backed by a robust legal framework, it guarantees the irrevocable transfer of assets, fostering trust and stability in the financial system.

Lastly, CeBM promotes financial stability as a risk-free instrument. This complements the existing credit creation process without adding additional risk, thereby keeping the financial ecosystem healthy.

Current Conditions, Completion Cycle Obstacles and PvP

One example relates to “differentiated settlement cycles” in cross-border securities settlements. 

The global characteristics of capital markets require harmonization of settlement cycles between regions. However, most real-time gross settlement (RTGS) systems have operating hours restrictions. 

For example, the Bank for International Settlements (BIS) has identified a limited five-hour time window (06.00-11.00 GMT) where there is maximum overlap. 

According to the WEF, wCBDC can help address this problem by enabling a global settlement window, equipping RTGS systems to operate nearly 24/7.

"wCBDC provides the opportunity to achieve transaction settlement at any time of the day as a complement to RTGS systems, provided they are designed with underlying automated operation features, as is done by a number of retail and commercial fast payment systems (FPS)," the report said.

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Other Challenges

Other challenges related to “operational risks and settlement failures” involve a variety of issues such as poor data quality, interoperability limitations, and manual processes that can lead to settlement failures in securities markets. 

In this regard, the WEF recommends that wCBDC can improve trading and post-trade operations by securely transmitting settlement data to all parties and jurisdictions to support automation and reduce settlement risks.

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Two issues wCBDCs can address are the increased risk of foreign currency transaction settlement and the lack of a tokenized, risk-free credit settlement platform. 

In the first case, wCBDC will facilitate the expansion of “payment versus payment” (PvP) mechanisms; this will enable the tokenization of a risk-free credit settlement medium.

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WEF Recommendations to Central Banks

The WEF recommends that policymakers, financial market infrastructure, and private sector leaders benefit from the insights presented in this report in their respective jurisdictions and institutions. 

In addition, WEF also encourages further steps in the exploration of this technology.

"This report presents important findings to encourage further exploration of wCBDCs and is expected to be an initial step towards a more efficient, responsible and secure financial market future," concluded the WEF.

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DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.