The Impact of Central Bank Digital Currencies (CBDCs)

Central Bank Digital Currencies (CBDCs) are emerging as a significant threat to traditional banks. The rise of CBDCs, often viewed as “crypto killers,” is an attempt by financial authorities to regain control over money movement before it becomes too decentralized. As per a survey by the Bank for International Settlements, 93% of central banks are exploring CBDCs, predicting up to 24 CBDCs in circulation by 2030. This development is causing anxiety among private banks, as a state-controlled payment and transaction system could significantly impact their revenue streams. CBDCs allow individuals and businesses to transact directly with the central bank, potentially diluting the deposits and accounts held by private banks. This shift could lead to reduced profit for banks, both large and small, especially in times of economic instability when depositors may opt to transfer their funds directly to central banks. There is optimism, however, that private banking institutions could become necessary intermediaries between CBDC platforms and consumers, depending on the political will of the central banks.

Central Bank Digital Currencies: A Seismic Shift in the Global Financial Landscape

Central Bank Digital Currencies (CBDCs) are paving the way for a seismic shift. Often regarded as potential "crypto killers," CBDCs represent an aggressive move by monetary authorities worldwide to control the decentralized finance movement before it expands beyond their reach. A survey by the internationally influential Bank for International Settlements reveals that a staggering 93% of central banks are evaluating the utility of CBDCs, forecasting the emergence of up to 24 operational CBDCs by 2030.

Private banking institutions, both small-scale and multinational, are witnessing the imminent transformation that CBDCs are set to bring to their traditional business models. The core capability of CBDCs to enable direct transactions between individuals, businesses, and central banks could result in a significant dilution of deposits and accounts held by private banks. In times of economic uncertainty, this shift could further accelerate, as nervous depositors may prefer the stability of central banks over their private counterparts.

However, the dawn of the CBDC era also brings with it a silver lining. A reimagined role for private banks as intermediaries between CBDC platforms and consumers could emerge, contingent on the regulatory and policy inclinations of central banks. With a focus on the customer, private banks could reinvent themselves in this novel landscape.

The potential extension of central banks' scope beyond payments and transfers to directly lending to customers adds another dimension to the CBDC narrative. This could herald the onset of a hyper-centralized user data ecosystem, where central banks could personalize interest rates based on individual creditworthiness.

Despite these radical shifts, CBDCs are primarily expected to act as digital forms of settlement. This would not necessarily eliminate the need for labour or oversight in banking operations. It could instead open avenues for traditional banks to innovate and compete in a CBDC-dominated world. The security, verifiability, and enforceability offered by blockchain technology could turn into strategic advantages for proactive banks.

Given the international reach of CBDCs, their impact will resonate across private commercial banks and central banks worldwide. The broad regulatory framework encompassing CBDCs may require drastic reform to keep pace with this change. Financial institutions must consider proactive engagement with regulators, investments in tech infrastructure, and the development of value-added services to mitigate potential challenges.

The timeline for these substantial shifts could span the latter half of this decade, with the proliferation of up to 24 CBDCs by 2030. However, this timeline could be subject to the velocity of tech evolution, legislative adaptations, and the policy decisions of individual central banks. The rise of CBDCs reaffirms that in the world of finance, change is the only constant.

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Existential threat? Why some banks are anxious about CBDCs

By allowing individuals and businesses to hold and transact directly with the central bank, CBDCs could dilute the body of deposits for private institutions.

CointelegraphDavid Attlee