CBDCs can stabilize the economy, but banks play a crucial role.

CBDCs can stabilize the economy, but banks play a crucial role.

The Growing Role of CBDCs in the Blockchain Industry

Central Bank Digital Currencies (CBDCs) have gained significant attention in recent times. They have become a major topic of discussion not only in the crypto community but also in the academic mainstream and geopolitics. While there is a broad consensus among national leaders and supranational financial institutions on the benefits of CBDCs, it is crucial to understand where they are best suited and where their adoption may not be feasible.

CBDCs can play a crucial role in supporting stable national and regional economies by helping central banks to implement more effective capital controls, stimulus plans, and other forms of monetary policy at the wholesale level. They can assist central bankers in smoothing market downturns, minimizing recessions, and expediting growth. These advantages make CBDCs a valuable tool in the hands of central banks.

However, implementing CBDCs at the retail level, serving individuals and corporations directly, is a complex undertaking. It requires expertise and nuanced understanding that central banks may lack. Wholesale CBDCs, and the blockchain technology they are built on, offer superior security, transparency, and streamlined issuance. Central bankers are well-equipped to leverage these benefits within the scope of their work. But extending CBDCs to industries or economic sectors solely based on their technological capabilities would be a mistake. CBDCs require accompanying professionals with expertise to fully harness their advantages.

Overreach in implementing CBDCs can pose challenges. While CBDCs offer central banks the ability to bypass commercial banks and act as direct issuers at retail and corporate levels, this approach is fraught with complexities and may not yield the desired results. Commercial banks have developed deep expertise over centuries in credit score evaluation, loan disbursement, account management, and a host of other services for retail and corporate clients. Attempting to undercut or cannibalize the entire commercial banking sector with CBDCs is neither efficient nor effective. Central banks must recognize the intricate nature of commercial banking and the need for specialized institutions to handle such responsibilities.

That being said, the adoption of CBDCs does not mean that commercial banking will be left behind. On the contrary, there are emerging on-chain tools available to commercial banks and money transmitters that can enhance efficiency, transparency, and security. Stablecoins, deposit tokens, and other distributed ledger technology (DLT)-based solutions enable commercial banks to offer these benefits to their retail and corporate clients. By utilizing wholesale CBDCs as collateral, commercial banks can issue stablecoins and deposit tokens for various commercial applications. Integrating additional on-chain tools will streamline cross-border transfers, create direct trade corridors, and enhance security and privacy for customers through cutting-edge Know Your Customer (KYC) procedures.

Commercial banks have the experience and expertise to manage deposit accounts based on central bank collateral and monetary policy. They are well-positioned to continue fulfilling these responsibilities in the digital era. The global adoption of CBDCs can lead to a financial paradigm where central banks implement superior monetary policy at the wholesale level, while commercial banks excel at the retail level using stablecoins and deposit tokens.

In conclusion, CBDCs have the potential to revolutionize the global economy. While their benefits can be realized in the wholesale sector, their implementation at the retail level requires caution and recognition of the specialized expertise of commercial banks. By striking the right balance and leveraging the capabilities of CBDCs and commercial banks, the blockchain industry can witness immense growth and transformation.