The blockchain technology has been gaining increasing traction across the globe and a recent report from the World Economic Forum, reiterates the same sentiment i.e. a bunch of central banks around the world are planning to collaborate with central bank digital currencies (CBDCs).
The WEF report cites a January 2019 report by the Bank for International Settlements (BIS) and states that a minimum of 40 central banks are conducting research projects and pilots with blockchain technology globally. Most of these projects are aimed at resolving issues such as financial inclusion, payments efficiency, and cybersecurity.
The report further states that CBDCs, which are issued on distributed ledgers and can be transacted in a peer-to-peer manner will enable faster and more cost-efficient transactions. Among the most noteworthy benefits of CBDC that the report lists are – the potential to improve Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures, reduce corruption, illicit activities and tax evasion, challenge commercial bank monopoly power of retail deposits and potentially provide alternatives to private sector payments technologies. The report reads:
“Moreover, CBDC can potentially play an important role in a future where cash usage dramatically declines. If the use and availability of cash within a country becomes extremely low or non-existent, whether by policy or consumer preferences, then CBDC could potentially aid citizens.”
Notably, the report also lists the potential downsides of CBDCs stating that banks should consider the challenges of blockchain technology as well, which includes transaction scalability, key management, transaction speeds, possible financial exclusion of populations who do not adopt CBDC that could further lead to marginalization from digital payment systems and risks financial stability from bank disintermediation.
The WEF provides ten use cases for distributed ledger technology (DLT) ?t central banks, including the development of retail central bank currency, interbank securities settlement, bond issuance and lifecycle management, and cash money supply chain, among others.
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