WFE Remains Sceptical about CBDC Adoption – Paper

The success of central bank digital currencies (CBDCs) is far from guaranteed, according to a new paper from the World Federation of Exchanges (WFE), which found that while these assets are crucial enablers of the development of tokenised ecosystems, they face many challenges.

High costs and low performance are some of the issues that the WFE, the industry association for exchanges and clearing houses, sees as hurdles. The paper notes that while 94% of central banks are currently working on CBDC projects, “the operational realities, efficiency needs and stability requirements of public markets” require careful analysis before adopting these digital tokens.

“This paper finds that CBDCs are a crucial enabler of a tokenised financial ecosystem. Nevertheless, their adoption and success depend on coordinated industry efforts and a balanced evaluation of benefits versus costs,” the WFE says.

On the plus side, CBDCs could offer efficiency gains in settlement, enhance the resilience of the payments sector by offering alternative rails, carve out a role as collateral and reduce counterparty risk. They could also improve audit trails and make cross-border payments more efficient than the current set-up involving traditional banking rails. CBDCs are also building blocks of tokenised ecosystems. 

Transaction speeds are slower than what low-latency trading and markets demand, however, and costs could outweigh benefits during periods of low activity. For efficient cross-border use, updates to the regulatory and legal frameworks around the world would be necessary, the paper says, adding this could only work with significant cooperation from authorities. Integrating these digital tokens with existing systems and ensuring they operate across infrastructures are also difficult challenges, the WFE says.

“CBDCs are necessary to enable digital ledger technology adoption in traditional financial markets. However, achieving widespread public market transformation may be limited due to high costs, technological demands, and extensive regulatory adaptation required. Its success is not guaranteed simply by its existence,” the paper states.