The Cambridge Centre for Alternative Finance (CCAF) has published a report on central bank digital currencies (CBDCs), more specifically, wholesale central bank Digital Currencies (wCBDCs), which may limit these digital assets to institutional use.
While CBDCs continue to be debated and some jurisdictions are actively experimenting (and China is testing live in the wild), the concept has received pushback from many sectors as privacy concerns remain paramount. While central governments may claim a desire to maintain privacy, the lure of accessing data and deep insight into transactions and user behavior is probably too strong. Eventually, public authorities may abuse the technology (as they have done many times in the past). China has already mentioned this characteristic as a benefit. One workaround is to limit CBDCs to institutions – central banks and their customers.
The CCAF report “discusses the need for wCBDCs as a risk-free settlement asset to support digital transaction infrastructure and mitigate potential instability arising from reliance on tokenised private assets.”
In effect, an upgrade to existing systems that may enable real-time, cross-currency, tokenized transactions. To quote the report:
“As tokenised markets continue to develop, the need for a digital form of central bank money increases, not only as a safer means of settling transactions in tokenised assets (vs private assets such as stablecoins and cryptoassets), but also to facilitate atomic settlement.”
Many central banks are considering wCBDCs as an improvement to the real-time gross settlement (RTGS) systems. At the same time, CCAF explains there is no clear cut definition of a wholesale CBDC. The report says the term is viewed as “tokenized central bank money” by some but not by others. Obviously there is a need for clarity within the digital currency realm.
The authors do not draw a final conclusion, stating that more analysis is needed as many central banks continue to question digital money. The report wonders if this is a “chicken and egg” paradox. Perhaps the private sector will lead the way and let the market guide the future of digital money? Maybe a clear regulatory approach to stablecoins will trailblaze the path, empoweing governments to leverage digital currency.
The report is available for download here.
