- The World Economic Forum (WEF) identified the key challenges wholesale central bank digital currencies (CBDCs) or wCBDCs could remedy within the near term in a new report.
- The organization noted that around 98% of central banks worldwide are studying and experimenting with wCBDCs.
98% of Central Banks Exposed to Wholesale CBDCs
The World Economic Forum published a report, titled “Modernizing Financial Markets with Wholesale Central Bank Digital Currency (wCBDC),” on April 16. The paper delved into the ongoing initiatives and use cases of these financial instruments. It also identified several “pain points” that needed to be addressed regarding the matter.
According to the WEF, a huge majority of central banks worldwide have, in some way, already dipped their toes in wCBDCs. The effort aims to streamline the payment processes and the security of transactions among financial institutions.
“Over 98% of the global economy’s central banks are researching, piloting or deploying central bank digital currency (CBDC),” the WEF pointed out. “There is an opportunity to harness this innovation in central bank money to enhance systemically important payments and securities transactions between financial institutions.”
The non-governmental institution likewise advocated for the promotion of “financial inclusivity” between the players in the field for the purpose of paving the way for a more resilient global economy.”
Challenges wCBDCs Could Address in the Short-Run
The document identified eight industry challenges plaguing the financial system. Four of them were deemed “key pain points” that were “ripe for modernization using wCBDCs.” The WEF opined these should be “considered as the near-term focus area” of wholesale CBDC programs.
The first issue mentioned was the “disparate settlement cycles” in cross-border settlements due to the inadequate harmonization of settlement cycles globally. The WEF explained this was due to the limited operating hours of most real-time gross settlement systems (RTGS). A wCDBC could address this dilemma by establishing a global settlement window with almost 24/7 access.
The second cause of concern lay in “operational risk and settlement failures.” The WEF said these could be due to market volatility, liquidity constraints, data quality problems, and too much focus on post-trade manual processes. Wholesale CBDCs would allow the automation of settlement procedures while mitigating the associated risks.
Other pain points enumerated in the report where wCBDCs could play a crucial role were the growing foreign exchange (forex) settlement risk and the lack of a tokenized credit risk-free settlement medium. The WEF recommended efficient “payment versus payment” (PvP) mechanisms to go around such a predicament in forex. Meanwhile, the inclusion of participants like Central Securities Depositories (CSD) and digital asset exchanges could help “deliver composable and programmable credit risk-free cash to eliminate counterparty risk.”
“This report offers key findings to facilitate further exploration of wCBDC and hopes to serve as a foundational step towards a more efficient, responsible, and secure future for financial markets,” the WEF paper concluded.