Will CBDC disrupt the traditional banking model?

  • In many ways Facebook’s Libra mission to build a global payment system and financial infrastructure was seen by central banks as a threat, and consequently was one of the main reasons the CBDC concept was initiated.
  • Most CBDC proposals have fixed maximum deposit levels to prevent bank runs.
  • The impact of CBDCs will be slow, playing out over the next 10 years with no material unified policy for a few years.
  • Risks to financial stability regarding capital flight redeposits are over-estimated. Restrictions would include caps in the CBDC wallet or interest rate differentials.
  • Central banks have a mandate to maintain stability and prevent systematic risk.
  • The Chinese CBDC model would be where the central bank takes control of the currency. In contrast, commercial banks and other players would provide CBDC to the public. This symbiotic approach seems the most logical.
  • China is a precursor in fintech and is already 12 months ahead in Blockchain terms, compared to the western world.
  • 5–7% of global GDP comes from money-laundering. CBDC could be a possible way to solve this problem.
  • Currently, Facebook, Amazon and American tech firms have large distribution networks which means any digital currency they launch could pose a threat to systemic stability. This would become a big challenge for commercial banks, as well.
  • In a world where tech giants offer their own digital currency and CBDC exists, a use case for commercial banks could be to provide KYC data to Facebook and other tech firms and charge for it. A big question remains on whether and to what extent big tech will be allowed to usurp bank business models.
  • Decentralised finance (De-fi) may compete head on in lending markets as people holding crypto are currently not recognised by banks, because banks don’t value crypto as real collateral. Commercial banks need to start digital units/divisions focused on revenue opportunities that replace losses in traditional business from CBDC.
  • Lending through savings accounts (not cash deposits) could make borrowing even more expensive. So, central banks may need to become direct lenders, but this itself creates risk as central banks don’t have any loan infrastructure.
  • P2P (peer-to-peer) lending will not solve the problem, because it has no leverage.
  • Wary of having a single system as in crisis periods its good for people to have different mechanisms to move money. This means there is room for different types of digital currencies to co-exist.
  • It’s still not clear which technology CBDC will be based on; one possible option is DLT trading, i.e. the trading (without clearing and settlement) of CBDC and other digital assets.

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