The central banks across various jurisdictions are increasingly looking at digital currencies (CBDCs) as an option; even as they are carefully considering the potential challenges and implication on the financial and monetary systems, according to panellists at the World Alliance of International Financial Centers (WAIFC) annual meeting.
This was the crux of the discussions at one of the sessions on CBDCs (central bank digital currencies) at the WAIFC online meeting, which is jointly organised by the Qatar Financial Centre (QFC) and Moscow International Financial Center.
Klaus Loeber, Head of Oversight Division of the European Central Bank, said the interest of a central bank for CBDC could vary, as do their mandates, may be reaction to the declining cash usage or active promotion of a cashless society.
The other possible motivations could be settlement efficiency, financial inclusion considerations, additional monetary policy instrument and tool to improve financial stability, and inhibit criminal activity.
"The demand for stable asset recorded on distributed ledgers sparked discussions around CBDCs," he said, adding the private sector had launched stable-coins as a potential new type of asset that aspires to bring stability in volatile crypto-assets market and in payment platforms often based on new technologies.
However, he said the key implications of CBDCs especially on the efficiency is that the possible cost reductions and indirect efficiency gains may outweigh disruption to the existing channels and the financial inclusion potential.
There could also be increased risk of currency substitution or faster shifts in holdings between currencies, he said, adding there could also be trade-offs between legitimate interest in privacy and money laundering and financing of terrorism concerns.
Dr Antonios Koumbarakis, head, Strategic Regulatory and Sustainability Services, Legal of PricewaterhouseCoopers Switzerland, said the long term trends driving digital payment systems are technological opportunities, digital transformation, changing consumer behaviour and expectations, decline of cash and long-term increase of card payments, increased payment diversity and rise of digital currencies such as Libra and bitcoin.
He said the CBDC regime could improve settlement speed and allows for payments in real time as well as boost competition in payment system and would require private actors to innovate.
"The CBDC could be used as a direct monetary policy tool if it was interest bearing, which would allow for more direct control of the money supply," he said, adding it would allow central banks to provide short-term liquidity assistance.
Nevertheless, the potential drawbacks of CBDCs could be additional compliance costs, lack of reliability, geographical limitations and the competition for commercial banks, according to him.
On the issue of the competition for commercial banks, Koumbarakis is of the view that the introduction of a near substitute for bank deposits may motivate the lenders to raise deposit rate and lead to a shift from deposit funding to wholesale funding.