Can central bank digital currencies help stabilize global financial markets?

• Despite global financial instability, central bank digital currencies (CBDC) are emerging as high priorities for central banks.
• 2022 was a flagship year for CBDC research and development (R&D), with a number of major related hackathons.
• Next is resolving outstanding questions about CBDC interoperability and how the technology fits into the broader financial sphere.

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Can central bank digital currency (CBDC) be a tool to support fragile markets? In 2022, there was instability in the traditional financial markets and extreme volatility in the crypto markets. CBDC is being explored in over 100 countries; an opportunity to implement the innovation in a way that will have the best macroeconomic and societal impact.

The global macroeconomic environment has been fraught, with challenges of high inflation, low growth and high debt. In 2022, inflation hit a 40-year high in the United States, and in a Pew Research Center analysis of inflation in 44 advanced economies, the majority had substantial increases in consumer prices since pre-pandemic levels.

The price of bitcoin peaked in November 2021, and since then cryptocurrencies faced a turbulent year in 2022 and lost more than $2 trillion in value. The Terra Luna crash, the fall of lending firm Celsius and hedge fund Three Arrows Capital (3AC), and the FTX collapse have exacerbated the extreme volatility in the space and brought increasing uncertainty to the cryptocurrency industry.

But does this market instability support or undermine the need for central bank digital currencies?

A flagship year for CBDC R&D

The G20 TechSprint is an annual event that is co-hosted with the G20 presidencies and the Bank for International Settlements, which takes the form of a global long-form hackathon series. The purpose of the TechSprint is to spur innovation for new technologies that could solve challenges facing the global regulatory and central banking community.

During a year of market instability and volatility, CBDC was chosen as the key tech innovation challenge. There was a call to action to provide tangible solutions and accelerate research and development in CBDC and explore the challenges that still need to be resolved. They include:

• A robust end-to-end CBDC solution
• Offline CBDC functionality
• Connectivity and interoperability

In addition, several other institutions are fast-tracking CBDC exploration in reaction to increasing interest in the topic. For example, Barclays and crypto solutions provider Ripple have both hosted hackathons for CBDC solutions.

The above is in addition to the growing number of central banks that have launched research, experiments and pilots related to CBDC. The list of central banks grew exponentially in 2022.

Central bank digital currencies are being explored in more than 100 countries. Image: CBDC Tracker

Innovation in a time of instability

Whether it is a reaction to current market conditions, an increasing belief in the potential of the technology, or the desire not to be left behind in this innovative exploration, there is a clear signal from central banks that CBDC is a top priority.

During periods of macroeconomic fragility, there is heightening pressure on central banks to improve economic conditions. Nevertheless, their steadfast commitment to CBDC exploration remains in place, because of the potential benefits during this turbulent period.

• What lessons can we learn from the current economic fragility that could inform the decision around implementing a CBDC or the design of an optimal CBDC?
• What have we learned thus far in CBDC R&D that could provide insight into how to address current market and monetary conditions?
• Can CBDC reduce barriers (such as high transaction fees or lack of access) that could improve monetary policy implementation in the future?

These are just a few examples of the types of questions that can be explored related to CBDCs, as central banks face challenging times. Despite the burden of improving financial stability, there are many lessons that central banks can learn that could lead to a more robust and resilient financial future.

An opportunity for global cooperation

There are more than 100 CBDCs in research or development stages; however, each country has a different motive for implementation, now exacerbated by geopolitical fragility and financial instability. With the increasing impetus to issue a sovereign digital currency, there is a clear need to ensure that the new systems and currencies in place are interoperable and improve the global financial infrastructure. In an increasingly fragmented world, how can we ensure the innovations in financial market infrastructure are created with cooperation in mind? With recent international crises affecting the globe, how can these digital currencies improve efficiencies across borders?

The World Economic Forum’s Blockchain and Digital Assets platform is currently exploring these questions in the context of a Central Bank Digital Currency Regional Roundtable Series. Kicking off in April 2022, the regional roundtables are continuing until the summer of 2023, including a session on CBDCs at the World Economic Forum’s Annual Meeting 2023.

The purpose of these roundtables is to bring together stakeholders from several regions and sectors to discuss the lessons learned from CBDC exploration and how regionally interoperable design can be integrated into the CBDC decision-making process. The series will result in a Regional Interoperability Principles publication.