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

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

WEF panel explains the benefits of CBDCs

A panel on central bank digital currencies at the World Economic Forum (WEF) meetings in Davos stressed that it has high expectations for central bank digital currencies (CBDCs) as part 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,
Governor of the Central Bank of Israel, noted several supposed advantages that these new financial tools might have, but also pointed out the difficulties of implementing them effectively.

Governor Velarde explained that he sees CBDCs as a solution for payments and credit that goes beyond banking integration. For him, the involvement of central banks in the implementation of these tools is related to the establishment of standards and the integration of private banks in the loop, while providing financial inclusion to people who are still outside the traditional banking system. In this regard, he stated:

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

Governor Amir Yaron explained that payments are now part of the forefront of the financial markets, which is why central banks are currently focusing on them. For Yaron, CBDCs could have a transition function between the digital world and private banking institutions. He stated:

We see faster payments, smart contracts, electronic money, crypto assets, and stable currencies, and CBDC is a public good that can be complementary but can also crowd out some of these things. CBDC could be the bridge between the new digital economy and the standard economy.

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

A smarter solution, with caveats

For Governor Kganyago, one of the key issues for the more than 100 banks around the world studying CBDCs is bridging the digital divide involving new types of money, such as crypto-currencies, which are currently emerging as an alternative to central bank-issued money, and modernizing payment systems.

In this sense, he believes that the environment is changing and that some central banks consider that they must change with it and offer these digital alternatives. For Kganyago, ultimately, there needs to be a national discussion on demand, where the big questions have to do with public choice on the use of CBDC.

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