In the evolving landscape of digital assets, central bank digital currencies (CBDCs) often cast a tall shadow as purported “crypto killers.” The agenda is simple – utilize the blockchain to regain monetary control threatened by the rise of decentralized finance. Remarkably, 93% of central banks are currently conducting CBDC research and we may witness as many as 24 CBDCs in circulation by 2030, according to a survey from the Bank for International Settlements.
However, in the ripple effect of CBDCs, banks seem to be the most significant potential losers. The idea of a state-controlled ecosystem of payments poses an existential threat for private financial institutions. Would they resist the inevitable or adapt to the confluence of finance and technology?
A controversial instance in the recent past highlights the bank versus CBDC tangle. Late last year, when First Republic Bank failed, JPMorgan acquired its assets. This move added significant potential risk to the financial system and was a violation of the Federal Deposit Insurance Corporation’s rule that limits a bank’s insured U.S. deposits pie. However, CBDCs could have prevented this, enabling the Federal Reserve to directly transfer the funds of the First Republic customers into Fed-guaranteed CBDC deposits. While this would have diluted the private banks’ portfolio, the financial system’s stability would have remained uncompromised.
Notably, the thirst for financial innovation and state-controlled monetary systems does not leave smaller banks untouched. Without the trust that a larger institution might command, a sudden economic shock could send depositors scrambling to withdraw their money, favoring a direct transfer to the central bank over their community banks if the CBDC option was available. Thus, while CBDCs could herald a new era of fiscal convenience, they may also exacerbate financial instability.
The looming threat of disintermediation in payments presents another daunting prospect. If central banks controlled the CBDC ledger, they could discern creditworthiness and history, potentially setting individual interest rates and offering loans directly to customers. Would this further deplete the services private banks had to offer, or could credit intermediation prove to be a saving grace?
There is, of course, a more sanguine view of the CBDC evolution. Some experts suggest the possible role of private banks as intermediaries between CBDC platforms and consumers, hinging on the political willingness of central banks. This arrangement could even prove profitable for private banks.
However, the relentless march of CBDCs, while not necessarily signalling the end of private banking, will undoubtedly nudge these traditional financial institutions toward greater technological integration. The ability to adapt to a landscape increasingly favoring digital currency, maintaining not just profitability but relevance, will be the real test for banks in the face of the inevitable CBDC revolution.
Source: Cointelegraph
