KUALA LUMPUR: The central bank digital currency (CBDC) platform offers various potential benefits for central banks, but there are also several risks that should be considered, said the International Monetary Fund (IMF).
Its financial counsellor and director, monetary and capital markets department Tobias Adrian said CBDC has the potential to make payment systems more cost-effective, competitive, and resilient.
“Due to their digital nature, CBDC could reduce the cost of managing physical cash, which can be substantial, especially in countries with vast land mass or many islands that are widely dispersed.
“Also, by offering a low-cost alternative, CBDC can help discipline payment markets, which are often highly concentrated. It can also improve the resilience of payment systems through the establishment of an alternate decentralised platform,“ he said in his keynote speech at the second day of MyFintech Week 2022 today.
He said in countries with a high share of unbanked population, CBDC could help enhance financial inclusion especially if they are paired with digital identification systems.
Not only will the unbanked people gain a safe place for their savings, the digital availability of micro-payment data offers a way for them to gain access to credit and other financial services, he said.
Adrian added that CBDC could be leveraged to improve cross-border payments, which are now often slow, costly, opaque, and not easily accessible.
“Cross-border payments largely rely on multi-layered correspondent banking relationships, which create long payment chains.
“CBDC could instead be traded more directly, to the extent that they share common technical standards, and data and compliance requirements,“ he said.
However, he also highlighted a few downsides to the CBDC, among others, the potential banking sector disintermediation as deposits could be withdrawn, perhaps abruptly, from commercial banks, if people decide to hold a lot of CBDC.
Additionally, Adrian said that offering CBDC requires central banks to be active in, or at least oversee several steps of the payments value chain including dealing with customers, building front-end wallets, picking and maintaining technology, monitoring transactions, and being responsible for anti-money-laundering processes.
Failure to satisfy any of the functions, whether due to technological glitches, cyber-attacks, or simply human error could undermine public faith in the central bank’s operations, he said.
Lastly, macro-financial risks could occur with the cross-border use of CBDC.
“These risks can be mitigated through appropriate design. For instance, offering a lower interest rate on CBDC holdings, or distributing CBDC through existing financial institutions.
“Cooperation among central banks will also be pivotal in building CBDC with features that help contain spillovers and help to facilitate backstops,“ he said.
Countries could explore the option of limiting transactions and holdings for foreigners, as well as implementing capital-flow-management measures, which might involve restrictions on certain cross-border transactions, he added. – Bernama
