Central bank digital currencies (CBDCs) may be a certainty – in other words, they’ll appear, here and there, depending on which nation you’re looking at, in months or in years. At some point, the digital euros, yuan, dollars – name your fiat – may well be ubiquitous. But for now, the rollouts are staggered, though the headlines are daily.
China is still experimenting with the digital version of its yuan, while relatively smaller nations, such as the Bahamas, have rolled out their own CBDCs (in this case, the Sand Dollar) into circulation.
The U.S. and various members of the European Union have been digging deeper into their own efforts to understand the challenges and opportunities tied to launching CBDCs domestically (with an eye on streamlining B2B and cross-border trade).
But any huge technological shift – particularly within a pillar of finance, such as central banking – might be seismic, and begs the question: What are the implications for some of the (traditional) stakeholders?
Seismic Shifts For Banks?
We’re thinking here of traditional banks, where scale and global reach have been important to bigger banks in getting funds where they need to go, and in powering the trillions of dollars that flow globally, with increasing speed. Depending on how you look at it, CBDCs represent feast or famine for big banks – and at least some observers think the advent of CBDCs could remove at least some key roles (and revenue streams).
As reported by Reuters, Denis Beau, deputy governor of the Bank of France, has said that CBDCs could give financial firms other than the big banks (read: non-traditional players) access to central bank money. At the same time, digital currencies might be enough to upend some of the traditional practices in settling large fund flows.
“Even if these actors would be … subject to similar regulatory requirements, the role of large banks in the settlement of transfer orders in central bank money would be challenged,” Beau said, according to Reuters.
To expand a bit on those thoughts, it’s worth going back to a December 2020 speech that Beau gave at a Paris summit. Digital currencies, he said, “might also invite central banks to examine the conditions under which they could make available their own settlement asset, central bank money, beyond the inner circle of banks.”
In at least some sense, the playing field gets larger as the infrastructure is laid to distribute CBDCs to firms, and also directly to consumers. In terms of disintermediation, in a paper last year by Jonas Gross of the Frankfurt School of Finance & Management and Jonathan Schiller of the University of Bayreuth, “CBDCs offer a riskless alternative to bank deposits. Savers might decide to store their money at the central bank instead of potentially fragile commercial banks.”
Disintermediation On The Horizon?
In times of economic upheaval, bank runs may occur. One way to prevent that type of disruption would be to introduce a “tiered” system, where limits might be imposed on just how much CBDC someone can hold or on how much holders can convert to CBDCs.
In a separate paper, the ECB stated that “central banks have ample experience with tiered remuneration systems. These could be readily applied to deposit-based CBDC and could address the structural and the financial crisis-related bank disintermediation issues without exposing households using CBDC for payment purposes to (perceived) final repression.”
For the banks, the opportunity lies with tapping into new infrastructure – new rails, so to speak – that can boost the range of services offered to new market entrants or end customers (remittances, or helping commercial clients modernize).
Anti-money laundering (AML) efforts will remain increasingly important – and as noted in this space, trust has long been a critical component in the relationship between banks and clients. Those assets, intangible though they may be, can conceivably be leveraged in the age of CBDCs.