CBDCs may pose risks to financial stability, cautions World Bank

The introduction of the Central Bank Digital Currency (CBDC) will not just increase the central bank's responsibilities but could also “disrupt the existing financial-intermediation structure”, the World Bank has said.

“Depending on design and country context, CBDC could pose risks to financial stability, financial integrity, data protection and privacy, and cyber resilience,” the World Bank said in its “South Asia Economic Focus” report on Wednesday.

Talking of the potential risks and challenges associated with the introduction of CBDC, the multilateral lending organisation said these could have implications for the legal and regulatory framework.

The warning from the World Bank comes at a time when many countries, including India, are exploring the issuance of CBDC.

According to a 2021 survey conducted by the Bank of International Settlements (BIS), 86 percent of the central banks worldwide were exploring the potential of CBDCs, while 15 percent were set to launch their pilot projects, Financial Express reported.

While Nigeria and the Bahamas have already launched the digital currency, other countries like China, South Korea, South Africa, Saudi Arabia, Jamaica, Eastern Caribbean, Ghana and Uruguay are in the piloting phase, the World Bank report said.

CBDC is a legal tender issued by the central bank of a particular country but in digital form. The new form of central bank money, denominated in the existing fiat currency, will be convertible into cash with authorized entities.

According to the World Bank, there are two types of CBDCs -- wholesale and retail CBDCs. Wholesale CBDCs are circulated among “predefined classes of agents” such as banks and select financial institutions. On the other hand, access and circulation of retail or general-purpose CBDCs are open to a wider class of agents, including individuals.

While presenting the Union Budget this year, Finance Minister Nirmala Sitharaman said the government would launch the digital rupee, a central bank digital currency, from 2022-23. Last week, Reserve Bank of India deputy governor T Rabi Sankar said the degree of anonymity in retail transactions through CBDC will most likely be the same as cash.

Sitharaman has also said 'Digital Rupee' is a conscious call taken in consultation with the Reserve Bank of India, and the government sees clear advantages in a central bank driven digital currency.