Why banks fear CBDCs

The Rise of Central Bank Digital Currencies in the Face of Crypto

In the wake of the failures that plagued the digital assets industry in 2022, central bank digital currencies (CBDCs) have emerged as a force to be reckoned with. Seen by some as “crypto killers,” the advent of CBDCs represents a strategic move by financial authorities to regain control over the movement of money before it becomes too decentralized. The push towards CBDCs is gaining momentum, with 93% of central banks already engaged in CBDC research, and projections suggest that there could be up to 24 CBDCs in circulation by 2030 ¹.

However, what often goes unnoticed in the public discussion, especially within the crypto community, is that CBDCs pose a powerful threat not only to cryptocurrencies but also to traditional banks. For private financial institutions, the prospect of a de facto state-controlled ecosystem of payments and transactions is viewed as an existential threat. In this rapidly evolving landscape, banks face a critical decision: should they resist the CBDC revolution or adapt to it?

How CBDCs Challenge Traditional Banks

JPMorgan CEO Jamie Dimon, a well-known critic of cryptocurrencies, expressed his reservations about CBDCs. He highlighted the complexities of banking services beyond simple money movement, such as fraud risk alert services, call centers, bank branches, ATMs, and the Community Reinvestment Act (CRA) ². Dimon’s apprehension reflects the concerns of traditional banks that stand to lose opportunities in the event of widespread adoption of CBDCs.

By allowing individuals and businesses to hold and transact directly with the central bank, CBDCs have the potential to dilute the pool of deposits managed by private banking institutions. This could have profound implications for their revenue streams and profitability ³.

To illustrate the potential benefits of CBDCs, former Greek Minister of Finance Yanis Varoufakis provided a case study involving the failure of First Republic Bank. Had a CBDC been in place, the Federal Reserve could have directly protected the funds of First Republic customers by placing them in Fed-guaranteed CBDC deposits. This would have averted the situation in which JPMorgan acquired First Republic’s assets in violation of regulations, resulting in substantial new deposits for the bank ⁴.

Smaller banks also face unique challenges. In times of economic turmoil, depositors seeking financial security may flock to the stability offered by CBDCs. In this scenario, smaller banks, despite their local charm, would be the first to lose panicked clients if depositors had the option to transfer funds directly to central banks. Financial instability could be exacerbated ⁵.

Another consideration is the potential competition from CBDC public operators or their private partners. While central banks currently limit the scope of their digital currencies to payments and transfers, there is no guarantee that they will not expand their services in the future ⁶. This expansion could encroach on the business models of traditional banks.

Acknowledging the challenges ahead, representatives from European private and public banking institutions have voiced cautious support for a “digital euro” initiative. However, they have also expressed concerns about the potential disruption to their business models. Bankers like Jerome Grivet from Crédit Agricole emphasize the importance of limiting the digital euro to a payment method, rather than a store of value. Burkhard Balz from Deutsche Bundesbank proposes that the private sector should play a pivotal role in distributing the digital euro, suggesting caution in expanding central bank control ⁷.

Is it Really That Bad?

While the threat of CBDCs to the prosperity of traditional banks is real, some experts believe that banks have yet to fully acknowledge the potential impact. Nihar Neelakanti, CEO of Web3 project Ecosapiens, suggests that curiosity rather than fear currently prevails among banks. The long-term trajectory will depend on the political will of central banks and whether private institutions can position themselves as necessary intermediaries between CBDC platforms and consumers ⁸.

However, the implications of CBDCs extend beyond disintermediation in payments and transfers. The ability of central banks to have direct access to the CBDC ledger means access to individual users’ credit history and worthiness. This level of centralized data could enable central banks to tailor interest rates to each borrower, revolutionizing the financial landscape ⁹.

But are CBDCs really the innovation many envision them to be? Ralf Kubli, a board member at the Casper Network, argues that CBDCs primarily serve as a digital form of settlement, acting as a payment rail on top of another payment rail. While they streamline settlement, they do not eliminate the need for labor or oversight ¹⁰. However, Kubli believes that CBDCs can fuel the pace of banks’ innovation in response to the new competitive environment. The introduction of CBDCs marks a paradigm shift in finance that necessitates a digitally native approach, incorporating the security, verifiability, and enforceability offered by blockchain technology ¹¹.

Conclusion

The rise of CBDCs poses both challenges and opportunities for traditional banks. As governments around the world actively research and develop CBDCs, banks must carefully consider their strategies to adapt and thrive in this new financial landscape. Ultimately, the impact of CBDCs on traditional banking institutions will be determined by their ability to embrace innovation and stay agile in the face of disruptive technological advancements.

Cointelegraph. (2023). Do CBDCs Pose a Threat or Opportunity for Traditional Banks? Retrieved from source ↩︎
Cointelegraph. (2023). Do CBDCs Pose a Threat or Opportunity for Traditional Banks? Retrieved from source ↩︎
Cointelegraph. (2023). Do CBDCs Pose a Threat or Opportunity for Traditional Banks? Retrieved from source ↩︎
Cointelegraph. (2023). Do CBDCs Pose a Threat or Opportunity for Traditional Banks? Retrieved from source ↩︎
Cointelegraph. (2023). Do CBDCs Pose a Threat or Opportunity for Traditional Banks? Retrieved from source ↩︎
Cointelegraph. (2023). Do CBDCs Pose a Threat or Opportunity for Traditional Banks? Retrieved from source ↩︎
Cointelegraph. (2023). Do CBDCs Pose a Threat or Opportunity for Traditional Banks? Retrieved from source ↩︎
Cointelegraph. (2023). Do CBDCs Pose a Threat or Opportunity for Traditional Banks? Retrieved from source ↩︎
Cointelegraph. (2023). Do CBDCs Pose a Threat or Opportunity for Traditional Banks? Retrieved from source ↩︎
Cointelegraph. (2023). Do CBDCs Pose a Threat or Opportunity for Traditional Banks? Retrieved from source ↩︎
Cointelegraph. (2023). Do CBDCs Pose a Threat or Opportunity for Traditional Banks? Retrieved from source ↩︎

Adoption,Banking,Banks,CBDC,Central Bank,Cryptocurrencies,Payments,Regulation

Why banks fear CBDCs