Time is of the essence, as banks grapple with the looming threat of central bank digital currencies (CBDCs). In other words, perhaps, the more time, the better.
To that end, a group of central banks – seven of them in all, gathered into a working group – stated through a Bank of International Settlements (BIS) report that disintermediation can be handled by the banks. In the report, “Central Bank Digital Currencies: Financial Stability Implications,” the banks noted that in its examination, it focused on a CBDC intended for retail use that would co-exist with private payment systems.
“We make an implicit assumption that CBDCs would most likely be offered with tools to minimize criminal usage and money laundering risks, i.e. less anonymous than cash, operating via intermediaries,” according to the report. At a high level, it stated, “to help maintain safety and stability, a CBDC would need careful design and implementation, allowing time for the existing financial system to adjust and flexibility to use safeguards.”
The impacts of disintermediation, the working group said, might be tied to a “significant” shift from bank deposits into CBDCs, “or even into certain new forms of privately issued digital money,” which could include stablecoins, and could have implications for lending. Risks would include bank runs.
“However, our analysis also suggests that these impacts would likely be limited for many plausible levels of CBDC take-up, if the system had the time and flexibility to adjust,” the report said.
In reference to the design of a CBDC, the BIS group said that “if a CBDC were intended as a means of payment rather than a form of investment, then it could pay an uncompetitive interest rate, negative interest (for example, to avoid undercutting bank deposits in jurisdictions where interest rates are negative) or be left unremunerated.” The group noted that thus far, the demand for existing non-interest-bearing electronic money, such as what has been seen in the U.K. and the EU, has been relatively low.
“However, CBDCs would be as safe as cash, with added electronic benefits and possibly attracting greater demand,” the report said.
Further actions by traditional banks in the face of CBDCs might include increasing deposit rates, with at least some offset from increased rates charged on lending.
“At the same time, if a CBDC led to lower cash usage, banks may also be able to reduce the costs associated with cash handling, helping their overall profitability. Cash operations have been estimated to account for between 5% and 10% of total bank operating costs,” noted the BIS report.
In separate actions this past week, the Bank of England has staffed two third-party working groups, which will provide input as the central bank looks into a CBDC.