Per a recent report from the World Economic Forum central banks around the world will soon be experimenting with central bank digital currencies( CBDcs). Also, per previous reports by the Bank for International Settlements (BIS), banks are willing to tap into distributed ledger technology to address issues like financial inclusion, payments efficiency, and cybersecurity.
CBDC is a potential application of blockchain and distributed ledger technology (DLT) where the central bank issues new money equivalent to – and redeemable for – its domestic currency, often simultaneously removing the equivalent amount of currency from the money supply. It may be issued for general use (“retail” CBDC) for peer-to-peer payments and payments from consumers to merchants, or for use by commercial banks and clearinghouses (“wholesale” CBDC) for more efficient interbank payments that occur outside traditional correspondent banking and other payment systems.
The report notes the best benefits of CBDC to be Know Your Customer(KYC) and Anti- Money Laundering (AML) procedures. These procedures will reduce tax evasion, challenge commercial bank monopoly power and also provide alternatives to private sector payments technologies.
However, there is a potential downside to CBDCs as well, saying that banks should consider the challenges of blockchain technology. These include transaction scalability, key management, transaction speeds, possible financial exclusion of populations who do not adopt CBDC. As this could lead to further marginalization from digital payment systems. More importantly, it can increase risks of financial stability in case of bank disintermediation.
Presently, the WEF provides ten use cases for distributed ledger technology (DLT) аt central banks. This includes the development of retail central bank currency, interbank securities settlement, bond issuance, and lifecycle management. In addition to cash money supply chain, among others.
Another set of institutions conducting projects with blockchain include- The Bank of Lithuania- it is planning to issue “Digital Collector Coin” to test blockchain in a small-scale and real environment. It will be linked to physical collector coins kept in the Bank of Lithuania’s vaults. The bank is also sponsoring a blockchain sandbox called LBChain.
Also, The Bank of Thailand is exploring CBDC for interbank payments and liquidity management efficiency with Project Inthanon. The Central Bank of Brazil is exploring DLT for an interbank payments contingency and resiliency system (Project SALT) as well as a decentralized information exchange platform.
The World Economic Forum curates a list of more than60 major reports, white papers, or speeches from central bank researchers, international organizations, or research
economists on the subject of blockchain and DLT for central bank processes and macroeconomics.