Central Bank

The prospect of a retail CBDC has some major banks anxious over their revenue streams.

In the current climate, which is pretty hostile for the digital assets industry following the failures of 2022, central bank digital currencies (CBDCs) are often perceived as “crypto killers.”

This is hardly an overstatement, as financial authorities’ aspirations concerning CBDCs are relatively straightforward: return firmer control over the movement of money before it gets too decentralized.

Governments around the world are becoming more proactive in that direction. According to a survey by the Bank for International Settlements, 93% of central banks are already researching CBDCs, and there could be up to 24 CBDCs in circulation by 2030.

What is largely missing from the public discussion on CBDCs, especially within the crypto community, is that — besides crypto — national digital currencies actually have a very powerful adversary: banks.

For private financial institutions, the idea of a de facto state-controlled ecosystem of payments and transactions represents an existential threat, in no way less than private cryptocurrencies. Will they try to slow the CBDC revolution or choose to adapt to it?

How CBDCs challenge traditional banks

JPMorgan CEO Jamie Dimon is famous for his anti-crypto stance, calling the industry nothing more than “a decentralized Ponzi scheme.” When asked about CBDCs, the banker’s response was less passionate but no less anxious:

“I don’t trust it will be properly done. [...] There’s a lot more to banking services than the actual token that moves the money. There are fraud risk alert services, call centers, bank branches, ATMs, CRA.” 

While there’s definitely a lot more to banking services than money movement, this abundance of opportunities would lose steam in the event of mass divestment, even if it happened exclusively among individual customers, not to mention corporate clients. 

By allowing individuals and businesses to hold and transact directly with the central bank, CBDCs could dilute the body of deposits and accounts and, hence, the money mass manipulated by private banking institutions.

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In his recent article on the matter, former Greek Minister of Finance Yanis Varoufakis cited the example of First Republic Bank. In May, when First Republic failed, its assets were sold to JPMorgan in violation of the Federal Deposit Insurance Corporation’s cardinal rule that no bank owning more than 10% of insured U.S. deposits should be allowed to absorb another U.S. bank.

While such a move, sanctioned by the United States government, puts even more potential risk on the financial system, it could have been easily avoided with the help of a CBDC. Then, the Federal Reserve could directly save the funds of First Republic customers by putting them in Fed-guaranteed CBDC deposits. In that case, though, JPMorgan wouldn’t get $92 billion in fresh deposits.

Would a U.S. #CBDC replace cash or paper currency? (1/3)
For more: https://t.co/BZ84GMKdR4https://t.co/A8aHz7H2FO pic.twitter.com/EyQU50fMZ8

— Federal Reserve (@federalreserve) February 15, 2022

However, it’s not only “too big to fail” institutions that have reasons to fear forgone profit. In an economic shock scenario where depositors seek refuge for their money, the smaller banks, despite all their mom-and-pop charm, would be the first to lose panicking clients should depositors have an opportunity to transfer their funds directly to central banks. In that sense, CBDCs could even worsen financial instability, noted Jonathan Guthrie in the Financial Times.

There are other issues as well, such as potential competition from the CBDC public operators or their private partners. For now, central banks tend to limit their digital currency ambitions with payments and transfers, but what exactly should stop them from broadening their scope of options in the future?

Bankers are well aware of such a scenario. In April 2023, representatives of both European private and public banking institutions voiced their cautious support for a “digital euro” — the initiative cherished by the European Union authorities. But some statements were heavily marked by worry. Jerome Grivet, deputy CEO of French bank Crédit Agricole, stated clearly:

“Central bank digital money could threaten the traditional banks’ business model by competing with their collection activity and disrupting their financing capacity.”

To avoid this, Grivet emphasized that the digital euro should be limited to use as a payment method rather than a store of value. Burkhard Balz, a member of the executive board at Deutsche Bundesbank, further suggested that central banks should be cautious about expanding their role too much in the digital euro ecosystem. He even proposed that the private sector should be responsible for distributing the digital euro.

Is it that bad?

“I don’t think there’s fear among banks regarding CBDCs, at least not yet,” Nihar Neelakanti, CEO of a Web3 project Ecosapiens, explained to Cointelegraph. “Right now, there’s more curiosity about how such a major technological upgrade to the financial system would play out.”

There is still a chance that private banking institutions will become the necessary intermediaries between CBDC platforms and consumers, although it will depend largely on the political will of the central banks. In that case, they could even profit from the new technology.

But no expert would deny the possible threat to the banks’ prosperity in a scenario where the central banks decide to take control.

And it’s not only a question of disintermediation in payments and transfers — what if the central banks decided to lend the money directly to customers?

“Theoretically, because central banks would have control over the CBDC ledger, they also could have access to one’s credit history and worthiness,” Neelakanti explained. In that case, user data could become so centralized that central banks could tailor interest rates to the individual customer’s credit-worthiness:

“There could be not a single Fed fund’s rate but rather a rate that is unique to each and every borrower in whichever country.”

Ralf Kubli, a board member at the Casper Network, was quick to disavow these fears, telling Cointelegraph, “Contrary to popular belief, CBDCs don’t offer much in the way of innovation beyond streamlined settlement.” 

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In Kubli’s analysis, central bank digital currencies are essentially just a digital form of settlement acting as a payment rail on top of another payment rail. Thus, they don’t reduce the need for labor or oversight. What they can do, however, is fuel the banks’ pace for innovation in the new competitive environment. A massive paradigm shift in finance is on the horizon, Kubli believes:

“To navigate the accelerating rate of change in our data-driven world, banks must embrace a digitally native approach to finance that incorporates blockchain’s transaction security, verifiability and enforceability.”