Key takeaways on digital currency from The Davos Agenda
Kathryn White, Ashley Lannquist, Ashlin Perumall and Yan Xiao
Last week was big for digital currencies with the Davos Agenda taking place and, separately, the release of the third BIS survey on central bank digital currency (CBDC).
Digital currencies, whether these are central-bank issued, price-stabilized cryptocurrencies (“stablecoins”), or non-stabilized cryptocurrencies such as bitcoin, are poised to have an impact on the financial system. In recent months we have seen new heights in bitcoin prices to $30,000-$40,000 per bitcoin, which has led to tremendous media coverage and growth in retail and, according to some sources, institutional interest and investment.
The recent BIS survey found that 86% of central banks are now exploring the benefits and drawbacks of a CBDC. And about 60% of central banks (up from 42% in 2019) are conducting experiments or proofs-of-concept, while 14% are moving forward to development and pilot arrangements (e.g. Project Helvetia with the Swiss National Bank￼, Turkey). In addition, one of the first use cases to move into production ha emerged in 2020 with the live CBDC in the Bahamas: the Sand Dollar.
However, despite very high interest in central banks globally, it is important to note that in almost all cases, the research and experimentation is exploratory and does not signify that the central bank that is carrying out the research or experiment has yet decided to issue a CBDC. There are also significant regulatory proposals and guidance coming out of the US government (such as those from the SEC, CFTC, OCC and FinCEN) and Europe (including France, Germany and the European Commission’s Markets in Crypto – Assets Regulation). Unfolding right before us is a potentially momentous worldwide transformation of digital money and its use.
The Davos Agenda featured two key sessions about Resetting Digital Currencies with members of the Forum’s Digital Currency Governance Consortium (DCGC) Steering Committee and global leaders in this space including President and Chief Executive Officer of the Western Union Company, Hikmet Ersek; Governor of the Bank of England, Andrew Bailey; Her Majesty Queen Máxima of the Netherlands; Chairman of North Island, Glenn H. Hutchins; Senior Minister, Government of Singapore, H.E. Tharman Shanmugaratnam; Chief Executive of the Overseas Development Institute, Dr Sara Pantuliano, and Chairman of the National Institute of Financial Research at Tsinghua University, People’s Republic of China, Dr Zhu Min.
During panel discussions (Session 1, Session 2), key conversations arose on global readiness to adopt digital currencies, the extent to which regulation should support innovation and some prerequisites for financial inclusion.
Responding with his vision of where CBDCs and other forms of digital currency fit in the current financial system, Governor Bailey sees the answer as nuanced. He acknowledged that immense innovation in digital payment mechanisms had taken place in recent years but cautioned that there were still considerable gaps to fill to reduce the cost of cross-border payments.
Regarding digital currency, Governor Bailey said, “no, we have not landed on the design governance and arrangements for a lasting digital currency. Cryptocurrencies as originally formulated are not it because people need assurance that their payments are made in something with stable value.” Acknowledging lessons from history, Her Majesty Queen Máxima summarized three key design principles that are important to get right:
1. A design of the currency that makes it stable and flexible.
2. A governance regime that instills trust in the currency
3. The provision of sufficient liquidity and some sort of stable backing.
Among those key governance challenges is the question of regulation and the potential competition between CBDC and privately issued digital currencies. According to Senior Minister Tharman, when regarding this innovative landscape, the intention is not to stop “the race.” The private sector players have been a source of fresh ideas and solutions, but they cannot be left on their own.
The payment system is a public good, and therefore needs to be regulated, interoperable and safe. Further, it needs to have the necessary transparency to avoid the risk of money laundering and illicit finance. Additionally, international players must collaborate with each other and international regulators to lay down the fundamental principles for such regulation.
Finally, important discussions were held on the prerequisites to financial inclusion as a focus area. Pantuliano outlined three critical prerequisites for making digital inclusion transformative for financial inclusion:
1. Access to the internet: in many low- and middle-income countries, and in rural parts of developed economies, internet communication infrastructure is very low. Even in the urban areas where at least the 3G network is about 90%, one needs to be cautious that this doesn’t exacerbate inequalities and digital exclusion. Countries that are seriously considering CBDCs need to ensure that there is sufficient internet and network infrastructure.
2. Digital adoption: about 3.8 billion adults in the world have access to a smartphone out of 8 billion. While this is predicted to increase, 100% accessibility is still far off. Before governments implement CBDCs, they will need to work with mobile providers to increase the rate of smartphone penetration.
3. Digital and financial literacy: it will be critical for people to understand, safely use, and trust the technology underlying CBDCs. CBDCs have the potential to benefit citizens and financial systems, however, they need to be designed with the end-users in mind, and especially those who are financially excluded.
These topics are core to the work of the World Economic Forum’s DCGC, which was first announced at the 2020 Annual Meeting and launched last spring. The DCGC is the first global multi-sector initiative for digital currency, a working group of 80+ member organizations from the public sector, private sector, civil society and academia, focused on creating a governance framework for digital currencies, including CBDCs and stablecoins.
It is anchored around a collective vision for the responsible and risk-aware development, deployment and adoption of new forms of digital currencies in both developed and emerging economies, and it reflects the Forum’s global multi-stakeholder model.
Last week during the Davos Agenda, the DCGC published a report that details the DCGC’s vision for the work to come in 2021.
Focus areas for central bank digital currencies. Image: World Economic Forum
We invite the Forum community and the public to accompany the DCGC as we tackle some of the most important policy and governance challenges to digital currency. Based on these key governance issues, what are your predictions for the roll-out and adoption of digital currencies globally?