Davos Watch: 'The Old World of Currency Now Has To Catch Up'
Experts say that the coronavirus pandemic has accelerated the pace of the shift from cash to digital payments, triggering an estimated 8% rise in non-cash payments in the euro area alone last year. But at the same time, a glut of central bank digital currency (CBDC) projects is finding progress slow, with state authorities – which view digital currencies as a potential risk to legacy finance – judging that they require further analysis and pilots before rollout.
These were the findings of participants at an online session at the World Economic Forum, entitled Resetting Digital Currencies – where some once again demonstrated ignorance by claiming that up to “half” of bitcoin (BTC) transactions may be linked to “illicit” behavior, and urged countries to pursue their own CBDC policies, rather than cross-border projects.
Zhu Min, the Chairman of the National Institute of Financial Research at China’s Tsinghua University, pointed out that, as part of the preparations for the much-awaited digital yuan launch by the People’s Bank of China (PBoC), a number of authorities have performed several small-scale tests in which members of urban communities were handed small amounts of digital currency to spend at participating merchants’ outlets.
Even this early stage, Min opined, it has become clear that CBDCs have the capacity to increase equality, transparency and facilitate the performance of social policies.
“We will continue to increase the number of tests. I don’t think we have a particular timeline, so we must carefully test the system. Because for finance and public services, security and stability is the most important thing.”
Asked about the cross-border risks associated with future CBDC projects, Tharman Shanmugaratnam, Singapore’s Senior Minister and Coordinating Minister for Social Policies, said that “the fundamental issue we are responding to is the rise of e-commerce” and the transformation of industries resulting from the digital shift.
“E-commerce is now a major force. And the old world of currency now has to catch up to this reality,” Shanmugaratnam said.
Comparing new emerging digital currencies to “closed gardens,” the Singaporean minister said that “what we have to do […] for an efficient payment system is to restore biodiversity.” And this, he claimed, was the role of central banks.
The reason for not pursuing a single, all-pervading CBDC is “you don’t want the whole system to blow up at once,” the minister said.
“[Central banks] should not close [their] options at this stage, and stay open-minded. The payment system is a public good. It must be safe, and it needs to have the necessary transparency to avoid the risk of money laundering and illicit finance. And roughly half of bitcoin transactions have something to do with illicit activities.”
As reported, according to Chainalysis, the criminal share of all cryptocurrency activity fell from 2.1% (USD 21.4bn) in 2019 to 0.34%, or USD 10bn in transaction volume in 2020.
In cases of financial crises, consumers could easily transfer their fiat currency into CBDCs which “could be very dangerous” to the banking system, the Singaporean minister claimed. He also called for the increased regulation of digital currencies.
Advocating CBDC rollouts despite the above risks, Sara Pantuliano, the Chief Executive at a London-based think tank, the Overseas Development Institute, commented that the current financial system has a very high logistical cost. This is particularly true in the case of developing countries, she said, but is also true of more advanced economies.
Pantuliano claimed that CBDCs could have other benefits, too, and could “help reduce the gender gap” inherent in the current financial system. They could also “help facilitate remittances,” which can total as much as 35% of the gross domestic products (GDPs) of some countries, she said.
“CBDCs have the potential to create a cross-border transfer system […] that is much faster, and much cheaper” than the existing framework, Pantuliano opined.
“It is important that regulators innovate [...] so that they don’t thwart innovation.”
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