Central bank digital currencies (CBDC) may be “disruptive” and could result in disintermediation between deposits and the banking system, adding to credit strains and pushing up interest rates, according to Fitch Ratings.
- The broader adoption of CBDCs will present authorities with trade-offs between risks and benefits, Fitch Ratings said in a research note.
- “Widespread adoption of CBDCs may be disruptive for financial systems if associated risks are not managed,” Fitch Ratings analysts Monsur Hussain and Duncan Innes-Ker wrote in the note.
- “These [risks] include the potential for funds to move quickly into CBDC accounts from bank deposits, causing financial disintermediation, and for heightened cybersecurity threats as more touchpoints are created between the central bank and the economy,” said the analysts.
- The firm said the key benefits of retail CBDCs lie in their potential to enhance authority-backed cashless payments and the opportunity to bring underbanked communities into the financial system.
- The downsides of CBDC include the potential that they may offer less privacy than cash or that governments could severely limit the amounts held in electronic wallets. Either scenario could deter the public from using them.
- The warning by Fitch comes as banks are racing toward launching CBDCs. In October, the Central Bank of the Bahamas officially introduced its digital currency, the sand dollar, a digital version of the Bahamian dollar, while China is close to launching the digital yuan and is testing the CBDC with commercial institutions and the public.
- Recently, the Bank of Israel said it is accelerating its research into CBDCs and making preparations in case it decides to issue a digital shekel.
- Elsewhere, Sweden’s Riksbank and the European Central Bank are actively researching and developing their own digital currencies in preparation for expected launches in the next four to five years.
- The U.S. Federal Reserve is taking a more cautious approach and carrying out experiments with no firm commitment to date.