World Federation Of Exchanges: CBDCs Could Accelerate Push Towards Tokenised Ecosystem

The World Federation of Exchanges (WFE), the global trade association for exchanges and clearing houses, has published a policy paper highlighting the advantage of Central Bank Digital Currencies (CBDCs) to the development of tokenisation, and warns that well-functioning CBDCs require a coordinated industry effort to achieve an efficient and well-regulated trading environment.

Tokenisation would see the advent of major benefits to the financial industry including fractional ownership - allowing multiple investors to own a share of an asset thereby lowering the capital requirement for individuals, financial inclusion by enabling smaller investors to access public market assets that were previously out of reach, improved transparency and security. 

The paper explains that a CBDC would introduce a new type of central bank money: a digital payment instrument that is a direct liability of the central bank, thereby avoiding the credit and liquidity risks associated with using commercial bank money or an alternative like stablecoins.

This gives market participants the reassurance they have when trading securities such as stocks, bonds and derivatives. The view of the exchange industry is that without this reassurance, it will be more difficult to develop widespread participation in the trading of tokenised assets. 

The paper details a number of issues that need to be addressed before CBDCs can be traded efficiently which fit broadly into three categories:

Investment
The whole market ecosystem, from exchanges to banks and asset managers, would need to invest heavily to update legacy systems to expedite settlement time to an appropriate level so they can be used as settlement assets in many trades. Small and medium-sized firms, or new entrants into the market, might find it difficult to comply with the infrastructure and technological demands required to integrate with a CBDC system. This could create a higher barrier to entry, concentrating market power among larger firms.

Legislation
Additionally, legislation would need to be updated to include the possibility of CBDCs as settlement assets and to ensure they can be used to make the final, irreversible settlement of a transaction in case of a default. 

Cross-border settlement
The benefit CBDCs bring to enabling cross-border settlements will make regulatory oversight more complex with differing legal frameworks for CBDC use. The lack of regulatory harmonization between different countries' CBDCs could create bottlenecks or legal disputes. 

Nandini Sukumar, CEO of the World Federation of Exchanges, said, “If the financial ecosystem at large agrees to make the necessary investment to ensure CBDCs are liquid and efficient, laws and regulation must then be updated to appropriately capture this new financial asset. We’ve laid out what is required to achieve this.”  

Richard Metcalfe, Head of Regulatory Affairs at the World Federation of Exchanges, said, “The Swiss experience demonstrates the utility of efficient CBDCs to the success of tokenisation, due to the enhanced trust, liquidity, financial inclusion and diversification, associated with CBDCs. Other central banks and policymakers should take heed of this example to generate the economic growth associated with tokenisation.”

Read the full paper here.