16 COVER STORY 17 Central Bankers Convene In Davos To Discuss Digital Money The introduction of a government-backed retail digital currency is predicted within the next five years During the World Economic Forum’s annual meeting in “Central banks are responding to the reality that digital lable to central banks to address the failures in existing Middleton. Davos central bankers from around the world will meet currencies, either privately or publicly-issued, will be payments systems for consumers, understand how digital The move may be fueled by a desire to improving the for breakfast with Forum Founder and Executive Chair- an unavoidable part of the global monetary system, the currencies may address these shortcomings, and take the overall effectiveness and resilience of a national payments man Klaus Schwab to discuss government-backed digital report says. It is in central banks’ best interest that they are initiative to deliver their own digital currencies, according system by reducing the prevalence of cash, says the currencies. neither left behind nor displaced.” to the OMFIF report. report. Alternatively, it could be associated with extending financial inclusion; reducing the size of the dark economy; The Forum has convened this global community from The Forum sees its role as helping central banks to decide One potential advantage of CBDCs is that they can in- countering financial crime; or for a specific purpose, such both emerging and developed economies to exchange how to best respond and remain relevant in a digital age. crease government seigniorage – the revenue generated as transforming the cross-border transmission of migrant best practice and learn about how CBDCs work. CBDCs, by monetary authorities through the process of money worker remittances. short for central bank digital currencies, are digitalized “There is a demand and a perception from institutions and creation – in the face of declining use of cash by redu- instruments issued by a central bank that can serve as an consumers to look into systems that will make things more cing distribution and management costs, according to Which central bank will be first out of the gate is an open electronic extension of a form of cash. efficient but really more fair,” says Sheila Warren, the Fo- the report. These savings would be especially helpful for question. Press reports that China is ready to issue its own rum’s head of blockchain and distributed ledger. “There is emerging markets, where low financial inclusion hinders CBDC have so far proven unfounded. Facebook’s announcement of Libra, a privately-issued a lot of concern about the traditional banking and financial growth. Since CBDCs can integrate national identity, stablecoin that could challenge the traditional global re- system. There is a perception that it is rigged in favor of they could reduce the cost of remittance by alleviating While in most instances, the development of CBDCs is serve currency system, has helped move CBDCs to the top certain kind of payers and the barriers to entry are very concerns about money laundering and terrorist financing. most likely going to be nationally driven, OMFIF predicts of central banks’ agendas. hard to overcome. These are real problems and there is a These improvements in the reach and stability of money, that increasing co-operation and collaboration between sense of a potential here that CBDCs could help level that along with potential digital features that enable negative monetary authorities is likely to become the norm. The challenge of privately-issued digital currencies is not playing field and I think that is compelling. If there is a way interest rates and smart contracts, could dramatically the only factor driving the discussion of CBDCs. Compe- to do that that is not seen as overly risky why wouldn’t you enhance monetary policy implementation. OMFIF also expects extensive private-public sector tition-driven innovations in cross-border transfers, mi- take a look?” partnerships to emerge, with the private sector providing cropayments and new payments instrument offerings are “There is a strong incentive for governments to get rid of or running technology, infrastructure and operations for profoundly affecting the way people pay, save and transfer cash and move to a fully digital payment system,” says central banks on an outsourced or collaborative basis. value. The application of these new technologies to Challenges And Opportunities Middleton. “It is a lot cheaper and it does make the exer- Its report predicts that there will be a growing number financial services and the desire of monetary authorities to cise of monetary policy easier.” of studies, use cases and pilot programs as both sectors address perceived weaknesses in payments infrastructures The OMFIF report says policy makers and regulators can’t “explore, design and test the art of the possible and desi- are rapidly combining to transform the prospects of central afford to sit on the fence. Libra and cryptocurrencies such It is likely a fiat retail digital currency will be introduced rable.” bank digital currencies from a theoretical abstraction to a as bitcoin give individuals the ability to store, spend and within the next five years, either as a complement to or as practical proposition, according to a 2019 report on retail move value en masse without relying on fiat currency. a substitute for notes and coins, according to the report. J.L.S. CBDCs by the Official Monetary and Financial Institutions “It is a direct challenge to the sovereignty of the state “It is improbable that the first such issuance will come Forum (OMFIF), an independent forum for central banking, and financial stability,” Philip Middleton, OMFIF’s Deputy from a G20 central bank; it is considerably more likely to economic policy and public investment. Chairman, said in an interview with The Innovator. be launched in a smaller and less complex economy in The Libra announcement highlights the opportunity avai- response to a specific policy objective and use case,” says