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Central bank digital currency: an opportunity or a threat for banks?

To support the digitalisation of trade and leverage new technologies to help them fulfil their traditional roles, most central banks have begun to think about issuing digital currency which would complement the supply of cash (notes and coins) and reserves. In the eurozone, the European Central Bank is currently assessing the costs and benefits of such a solution and could announce the launch of a “digital euro” as early as next year (1).

The concept of a central bank digital currency (CBDC) encompasses a range of different designs depending on the economic agents that might have access to it and how it might be held and exchanged.

“Wholesale” CBDC: a technological innovation to facilitate interbank transactions

A first form of CBDC would be restricted to transactions between financial institutions. This would help make wholesale payments and settlements systems more efficient by leveraging a technological innovation: blockchain. This innovation consists of recording transactions in cash and Securities in a digital register that would be shared by all financial institutions, rather than outsourcing bookkeeping to intermediaries. Trials of wholesale CBDC, involving a number of financial institutions and central banks, are currently in progress. In France, such trials have already seen debt securities issued on a blockchain.

“Retail” CBDC: a threat to traditional banking models

A second form of CBDC would be available for use by all economic agents, including households and businesses. It would be both a trading instrument and a store of value, held on a digital medium. This medium could be akin to a digital banknote or attached to a bank account, registered directly with the central bank or with a commercial bank.

The reasons why central banks might want to issue digital currency for use by individuals and businesses are, in the first instance, defensive. It would be a way for central banks to counter both the decline in the use of cash for day-to-day transactions and competition from new forms of digital assets: cryptocurrencies. This competition first arose with the creation of bitcoin in 2008 and has intensified with “stable coin” projects like Facebook’s Libra. These stable coins would be indexed to the value of a basket of traditional currencies, making exchange rates less volatile than for other cryptocurrencies. Retail CBDC deposits could also be interest-bearing, with central bank control over the interest rate constituting a new monetary policy instrument.

With its value guaranteed by the central bank and a potentially attractive interest rate, retail CBDC could be welcomed by individuals and capture a portion of bank deposits, with negative implications for banks’ profitability, solvency and liquidity. First, such a shift would adversely affect profitability: banks would be forced either to pay more interest on deposits or to refinance themselves more in the money market, at terms that would become less favourable. The loss of information about deposit-holders’ transactions could also adversely affect lending decisions and the quality of banks’ assets.

Lastly, arbitrage opportunities between bank deposits and CBDC could make liquidity management more complicated for banks. CBDC could pose more of a threat to certain types of banks – in particular those specialising in savings and payment services – than to universal banks, whose customers value integrated deposit, payment, investment and borrowing solutions. However, all traditional players would benefit from proposing more innovative payment solutions that are more closely integrated into the payment or billing process, offering higher added value to users. For more information, see our publication Perspectives – Banking sector: Central bank digital currency: an opportunity or a threat for banks?, dated 3 November 2020.
Lionel Potier
lionel.potier@credit-agricole-sa.fr

(1) https://www.ecb.europa.eu/euro/html/digitaleuro.en.html

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