World Economic Forum Introduces Central Bank Digital Currency Framework

World Economic Forum Introduces Central Bank Digital Currency Framework

The World Economic Forum (WEF) is now introducing a toolkit for policymakers looking to implement central bank digital currencies (CBDCs). This came during the ongoing WEF conference in Davos, Switzerland.

The WEF is introducing a CBDC framework for policymakers

Specifically, the World Economic Forum is partnering with some of the largest central banks in the world for this initiative. According to the WEF’s announcement on January 22nd, the framework is primarily meant to help policymakers better understand CBDCs.

To preface this discussion, central bank digital currencies are essentially central banks’ response to cryptocurrencies. However, instead of ceding control of the currency like impartial cryptocurrencies do, CBDCs are still under central banks’ control.

As such, CBDCs have historically seen opposition from cryptocurrency supporters. At the same time, however, CBDCs are also seen by some as a way to pave the way for cryptocurrencies. If regulators around the world are truly going to embrace decentralized digital currencies, some argue CBDCs are a necessary first step.

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With that said, however, many criticize CBDCs for lack of a unifying framework. Moreover, although some countries are already investigating CBDCs, there is a lack of coherency in different countries’ approaches.

This is why the WEF is now introducing a framework that it hopes will guide policymakers in creating CBDCs.

The framework is made in collaboration with central banks researchers, regulators and experts

What’s more, the WEF has collaborated with international organizations, central bank researchers, regulators and experts from over 40 different institutions to design the framework. The head of blockchain and distributed ledger technology at WEF, Sheila Warren, highlighted its importance:

“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.”

Many different central banks are currently looking into developing a CBDC of their own. For example, Bank of Thailand’s governor, Veerathai Santiprabhob, said that her organization is making good headway on its CBDC implementation.

Going under the name Project Inthanon, rumors indicate that Thailand’s central bank has begun cooperating with Hong Kong. Specifically, the two actors are reportedly contemplating implementing a joint CBDC for cross-border payments. Moreover, Santiprabhob welcomed the WEF’s new CBDC toolkit:

“From our experience, we need to identify tradeoffs between benefits from the use cases and their associated risks across different dimensions. This is where the Policymaker Toolkit could usefully provide an actionable framework for CBDC deployment.”

The framework allows for three main types of CBDCs

Interestingly, the World Economic Forum’s framework also allows for three different types of CBDCs. These are either “retail”, “wholesale”, or “hybrid”. A retail CBDC would allow non-financial users to have accounts for digital currencies. 

A wholesale CBDC, on the other hand, would constitute an electronic system for commercial banks and financial actors. This system would mainly involve interbank and security transactions. 

The hybrid CBDC, on the other hand, would give central bank deposit access to financial actors who otherwise wouldn’t have this. Consequently, this will supposedly give rise to stronger safeguards and greater interoperability between different payment systems.

In the case of a DLT-based CBDC, the paper also states that the central bank would have full control over the digital currency’s issuance.

“[The central bank] could delegate transaction approval to a more decentralized network, most likely consisting of regulated financial institutions. Transaction approval could follow a pre‐specified consensus process determined by the central bank, which could include privileges for the central bank such as transaction ‘veto’ powers or visibility. It is also possible to develop a DLT system in which the central bank remains the only validating node yet it benefits from other advantages related to DLT.”