China plans an early trial of the new field of central bank digital currencies (CBDCs). It will give foreigners their first real chance to make payments using electronic renminbi issued by the People’s Bank of China. However, bankers may feel threatened, as CBDCs could significantly diminish the role of traditional lenders.
New forms of digital money promise to be easy and cheap to hold and exchange, but that gives them the potential to rock the power bases of fiat currencies.
China’s long-running project to develop digital yuan is part of a broader challenge to the financial influence of the US. It is also a defensive response to the growth of private payment systems in China, such as Alipay.
In the same time, developed democratic countries fear their own currencies may be partially displaced by frenzy crypto alternatives. Many of them are already mulling the creation of their own CBDCs.
What does all of this matter to banks? If they can intermediate transactions in pesos and riyals, why not in digital currencies? Many US banks are already preparing to deal with Bitcoin.
The problem is that theorists typically think central banks would need to become retail deposit takers for their CBDCs to gain critical mass. And taking retail deposits has been a core business for bankers in Europe since the Middle Ages.
A deposit account with the European Central Bank or its satellites would look attractive to many Europeans when interest rates were low or financial panic was rife. Central banks in developed economies do not collapse with the risk that customer deposits will evaporate. In contrast, several commercial lenders were wiped out in the financial crisis, including Northern Rock and Anglo Irish Bank.
Paradoxically, central bank CBDC deposits could worsen financial instability for this reason. Suppose that in another meltdown enough terrified depositors switched their funds from the branch of their local bank in the piazza to the safety of the Bank of Italy. The local bank would then be in serious trouble. According to a study by Andrea Filtri, co-head of equity research at Mediobanca, Around €11tn of deposits could theoretically be vulnerable across the eurozone.
Tycoons like Fabio Panetta, a board member of the ECB, have suggested capping the amount of digital euros that customers could deposit with central banks. The favoured sum is €3,000, roughly the per capita amount of banknotes in circulation in the eurozone.
Marion Laboure, a Deutsche Bank strategist, adds: “I would be more concerned by a lack of adoption than too much of it — it takes time to create a habit.”
The customer inertia that favours banking oligopolies is just one obstacle to CBDCs in developed democracies. Another issue is privacy. You do not have to be a money launderer to dislike the idea of state bodies being able to see each of your transactions that might be possible with blockchain-based CBDCs.
The problem is jokingly illustrated with the “cheeseburger transaction declined scenario,” where government caretakers “switch off” electronic money an overweight citizen wants to spend on an unhealthy snack.
None of these snags with CBDCs gets commercial banks entirely off the hook. The business model of most of them bundles multiple services together to create economies of scale. CBDCs figure as one of the innovations threatening to pick that business model apart.