CBDC likely to pose risks for financial stability, says World Bank

The World Bank has said that introduction of the Central Bank Digital Currency (CBDC) could potentially pose risks to privacy, increase responsibilities of the central bank, and may also lead to currency substitution through cross-border transactions.

“The introduction of CBDC could disrupt the existing financial-intermediation structure. In addition, depending on design and country context, CBDC could pose risks to financial stability, financial integrity, data protection and privacy, and cyber resilience. Further, it can have implications for the legal and regulatory framework, increased responsibilities of the central bank, and could also lead potentially to currency substitution, especially in the context of cross-border CBDC,” the multilateral lending organisation said in its latest “South Asia Economic Focus” released on Wednesday.

CBDC differs from traditional central bank money in that it can be digitally created and recorded on centralised or decentralised ledgers.

There are two types of CBDCs: Wholesale CBDC, for which access and circulation are restricted to predefined classes of agents. They are typically banks and select financial institutions under specific regulatory and policy requirements, as is the case today with central bank reserves. Then, there is the retail or general-purpose CBDC, for which access and circulation are open to a wider class of agents, including individuals.

Many countries, including India, are exploring the issuance of CBDC. The Bahamas and Nigeria have already launched CBDC. Others are in the piloting phase, including Jamaica, Eastern Caribbean, China, Ghana, South Korea, South Africa, Uruguay, and Saudi Arabia.

Many are in the research phase, like India, which has announced that it would launch its CBDC during the current financial year.

Reserve Bank of India (RBI) deputy governor T Rabi Sankar last week indicated that the degree of anonymity in retail transactions undertaken through CBDC will most likely be the same as cash.

“This means there is anonymity for small-value payments and beyond a threshold, there need not be any anonymity. How this anonymity can be achieved, whether it can be achieved through technology by killing transactions...or whether it will be achieved by law by restricting access to data that remains with the central bank. These are the things that we will have to decide as we go along.” he added.

The World Bank said the relative weight and importance of CBDC depend on specific country contexts and the design features.

“On one end of the spectrum, countries may wish to preserve the role of public money and safeguard financial stability and monetary sovereignty. On the other end of the spectrum, some countries may wish to use CBDC to supplement traditional digital payments and to promote financial inclusion, government payment disbursements and collections, cross-border payments, competition and interoperability,” it said.

Although not a panacea, the World Bank said CBDC could potentially help fill the gap in traditional payment systems and promote financial inclusion.

“To meet the financial inclusion challenge, however, CBDC would have to be designed with that objective in mind. CBDC design aspects that encourage financial inclusion include the affordable cost of onboarding and transaction, offline capabilities, privacy and remuneration. A CBDC system needs to be easy to access through a simple user-enrollment process, convenient to use through a large network of agents and service providers, and acceptable for daily-life use cases at merchants, billers, and by the government, on a continuous basis. However, even though CBDC can facilitate financial inclusion, it is not a necessary condition. Other existing payment systems and arrangements, such as well functioning fast payment systems, have also been successfully utilised for the same objective,” it added.