One of the biggest concerns regarding central bank digital currencies (CBDCs) is the disintermediation of retail banks and the economic impacts of reduced deposits.
Last week, the Deutsche Bundesbank released a report containing the survey results on the possible impacts of bank disintermediation by the digital euro. It explored how households would react to the CBDC and combined the answers with an economic model to test the effect on banks.
The survey revealed that only slightly more than a quarter of respondents had heard of CBDCs and that more people would be interested in using them if they paid interest.
The overall estimate was that 10% of German money holdings would shift into the digital euro, with bank deposits being hit the hardest.
Boohoo for the banks, but it could be everyone’s problem
Since central banks started experimenting with CBDCs, their potential to drain retail bank deposits has been discussed at length. There tend to be two camps in this debate: those concerned about the economic and political impacts of this change and those who say “boohoo” to the bankers and dismiss their concerns as an attempt to protect business interests.
While it’s tempting to enjoy a touch of schadenfreude at the bankers’ panic, given that most of them got off the hook without any penalties after the 2008 Great Financial Crisis, there are potential issues to consider before enjoying their pain.
On top of the political concerns about central banks having too much control if CBDCs become ubiquitous, there are potentially serious economic impacts, too. We all witnessed what happened in 2008 when a few banks failed, and we got a sharp reminder when Silicon Valley Bank collapsed more recently.
While most would agree that banks should adapt and face competition like the rest of us, it would be foolish to simply wave off their concerns about the economic impacts of CBDCs. Not only could a few weaker banks fold in the face of dwindling deposits, but credit, which is the lubricant of all advanced economies, could contract. Banks need deposits to make loans under the fractional reserve system.
However, there’s another side to that coin; CBDCs like the digital euro would enable central banks to more easily stimulate the economy and distribute cash and credit during a crisis. During COVID-19, we saw how some banks weren’t making many loans despite having received abundant central bank money to shore up liquidity. In the United States, there was a considerable tightening of lending despite the abundance of central bank money they had received from the Federal Reserve.
The debate about CBDCs rages on, but they’re coming
Retail bankers will warn about the consequences of reduced deposits, privacy advocates will yell from the rooftops about CBDCs and the road to tyranny, and central banks will continue to tout the virtues of digital money. However, CBDCs are coming no matter what, and in many places, they’re already a reality.
While the Bundesbank President recently said the digital euro wouldn’t be a reality anytime soon, he estimates it will be released in 2028-2029, which is sooner than CBDC opponents would like. All over the world, CBDCs are being designed, tested, and rolled out.
It would be wise for everyone to contemplate the potential consequences, both good and bad, of CBDCs and make their feelings known to their political representatives. It would also be wise to learn about and start using scalable alternative electronic cash systems like BSV.
To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.
Watch: Finding ways to use CBDC outside of digital currencies
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