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Is the central bank digital currency development a game-changer for business?

13 February 2020: while experts have hailed the cross-border cryptocurrency strategy outlined in Davos as a potential tipping point, major regulatory and legal hurdles still block the widespread adoption of digital currencies. Mark Taylor reports.

The World Economic Forum (WEF), along with more than 40 central banks and other members of the global financial community, has laid the groundwork for a regulated central bank for digital currencies (CBDC).

The strategy was unveiled at the recent Davos conference, where the non-governmental organisation said the growing interest in digital and cryptocurrencies was accelerating to the point where they could no longer be ignored.

Accountants have been advised to keep a watching brief on the CBDC development. Until now, the lack of international consensus on cryptocurrency governance is one of the main reasons no significant applications have been developed for the sector.

EY has warned previously that digital currencies are mainly opportunities to evade regulation and run contrary to common reporting standards, the US Foreign Account Tax Compliance Act and intergovernmental data-sharing.

The WEF, however, has for the first time tapped insights from central bank researchers, global policymakers and international organisations to create the CBDC Policy‑Maker Toolkit. The guide is intended to help regulators through the evaluation, design and deployment process of implementing a CBDC in their domestic country.

Blockchain and academic experts also contributed to the toolkit to help central banks evaluate whether CBDC is the right fit for their economy. Digital currencies can help improve financial inclusion in some of the world’s poorest areas, the consortium said, but only when paired with proper regulation.

Potential game-changer?

The WEF said the involvement of central banks could mean the management of some of the risks associated with digital currencies, and an added element of transparency and stability. Experts said cross-border CBDC could be “a game-changer”, but major regulatory and legal hurdles are likely to endure.

“Generally speaking, a cross-border CBDC could bring significant advantages to consumers and/or financial institutions alike,” said Carlo Cocuzzo, Economist in Thematic Research at ING bank. A wholesale digital currency could streamline and enable smooth cross-border payment flows, Cocuzzo said, while at retail level, a CBDC could allow consumers to transact and send more efficient payments globally.

“However, there are still a number of issues to address,” he said. “Firstly, for this to happen central banks would have to allow foreign entities to hold CBDC and this is not necessarily desirable from a financial and regulatory perspective. Secondly, frictions in the currency market are likely to remain as cross-border CBDC transactions require currency conversion.”

Blockchain “yet to find its place in the profession”

ICAEW has conducted widespread research into both blockchain and cryptocurrencies, given the relevance of the payment method and its underlying technology to the accounting sector.

Experts at the Institute echo the sentiment that the technology has been floating around for some time without a “killer application” or solid use-case emerging, with all the concerns about money laundering, counterfeiting and instability from a decade ago still not answered.

“Our impression is that despite a lot of early excitement, ‘business as usual’ blockchain applications seem never to arrive,” said David Lyford-Smith, Technical Manager in ICAEW’s Tech Faculty.

The most likely barrier from ICAEW’s perspective is that blockchain solutions require a quorum of support from across a marketplace to work, and so governance and legal issues often halt projects more than technical issues, he said.

“And yes, in cryptocurrency specifically, the fact and rumour of illegal activity has kept many potential users away, along with the various technical and stability issues,” said Lyford-Smith. “All in all, crypto is something that we’re focusing on, helping members engage with and handle when they come across it, but while maintaining a cautious view of it all.”

ICAEW views blockchain as an accounting technology (“universal entry bookkeeping”, said Lyford-Smith), and one which accountants should monitor, but recognises it is yet to find its place in the profession.

“This kind of large, cross-country and sector project is exactly the sort of thing we’re going to need to see if it’s going to find its place, so it will be interesting to see if this is another group looking to review and consider how to regulate crypto, or if there’s more direct interest in making it work,” concluded Lyford-Smith.