In the current environment that is already challenging for the digital asset industry after several high-profile bankruptcies that occurred in 2022, Central Bank Digital Currencies (CBDCs) are often perceived as a potential threat to cryptocurrencies.
This is not an exaggeration, as the financial authorities’ objectives regarding CBDCs are relatively simple: return to tighter control over the money supply before it becomes too centralized.
Governments around the world are taking more and more measures in this regard. According to a survey by the Bank for International Settlements (BIS), 93% of central banks already researching CBDCs: There may be 24 different in circulation by 2030.
However, what is missing from the public debate about CBDCs, especially within the crypto community, is – outside of cryptocurrencies – CBDCs actually have a very strong competitor: banks.
The idea of a fully government-controlled payments ecosystem for private financial institutions poses as serious a threat as cryptocurrencies. Will banks try to thwart or embrace the CBDC revolution?
How do CBDCs compete with banks?
Jamie Dimon, CEO of JP Morgan, is known for his anti-cryptocurrency stance: in the past he has called the entire industry “a massive decentralized Ponzi scheme.” Here is his view on CBDCs: equally negative:
“I don’t trust them to be done correctly. […] Banking services are much more than tokens that move money. There are fraud risk warning services, call centers, branches, ATMs, CRAs.”
Even though banking services go far beyond the movement of money, in the event of mass liquidation, even among individual customers, let alone companies, this system collapses.
By allowing individuals and companies to transact and hold directly with the central bank, CBDCs can reduce the number of deposits and current accountsand finally, the money supply in the hands of private banking institutions will decrease..
In a recent article on this topicYanis Varoufakis, former finance minister of Greece First Republic Bank case. In May, when First Republic filed for bankruptcy, its assets were sold to JP Morgan, violating the Federal Deposit Insurance Corporation’s key rule that prohibits a bank holding more than 10% of US insured deposits from buying another US bank.
While the US government-sanctioned event poses even more potential risks to the financial system, Could have been easily avoided with the help of CBDCs. The Federal Reserve could have protected the First Republic’s client funds directly by placing them in Fed-guaranteed CBDC deposits. In this scenario, JP Morgan would not have received $92 billion in new deposits.
– Federal Reserve (@federalreserve) February 15, 2022
But CBDCs do not only pose a threat to large institutions. In an economic shock scenario where customers want a safe place to store their money, small banks fall first: Panic will actually push users to transfer their funds directly to central banks. In such a scenario, CBDCs could exacerbate financial instability. Notes on Jonathan Guthrie at the Financial Times.
There are other problems, for example, potential competition between public CBDC operators and private partners. Currently, central banks tend to limit their digital currency ambitions to payments only – but what could prevent them from expanding their services in the future?
Bankers are well aware of this scenario. In April 2023, representatives of both public and private European banking institutions expressed their cautious support for the “digital euro”, an initiative championed by European Union officials. However, some statements show a veil of concern. Jerome Grivet, deputy director of French bank Crédit Agricole, bluntly said:
“A CBDC could pose a threat to traditional banks’ business models because it could compete with their businesses and destroy their financial strength.”
To avoid this, Grivet points out that the digital euro should be used as a payment method rather than a store of value. Deutsche Bundesbank board member Burkhard Balz also suggested that central banks should be very careful before expanding their role in the digital euro ecosystem. Always According to Balz, the private sector should undertake the distribution of the digital euro.
Would that be such a bad scenario?
“I don’t think there is a fear of CBDCs among banks, at least for now.“Nihar Neelakanti, CEO of Ecosapiens, explains to Cointelegraph.”Currently, there is more curiosity about how this innovative technology could affect the financial system.“
There is also the possibility private banking institutions act as intermediaries between CBDC platforms and customers, but this will largely depend on the political decisions of central banks. In such a scenario, private banks could even profit from this new technology.
But no expert would dream of denying possible threats to the growth of private banks in a scenario where central banks decide to take full control. And it’s not just a matter of disintermediation of the payment system: What if central banks decide to lend directly to customers?
“In theory, central banks would also have direct access to a person’s credit history and wealth, as they would have control over the CBDC database.explains Neelakanti. In this case, user data becomes so centralized that central banks can tailor interest rates to the individual customer’s creditworthiness:
“There may no longer be a single Fed rate, but instead a single rate for every borrower in any country.”
Ralf Kubli, a board member of the Casper Association, quickly dismissed these fears, telling Cointelegraph:Contrary to popular belief, CBDCs don’t offer much in the way of innovationbeyond the simplification of the reconciliation process.“
According to Kubli’s analysis, CBDCs are essentially a form of digital payment that functions as a means of payment above any other payment method. Therefore, they do not streamline business processes or supervisory processes.; they are only useful to give banks a breath of innovation in a new competitive context. Kubli believes that a major paradigm shift in finance is on the horizon:
“To keep up with the ever-increasing changes in our data-driven world, banks need to adopt a digital finance approach that includes the security, transparency and immutability of blockchain transactions.”
Translation of Giorgio Libutti