The year 2021 will have been marked by an explosion of CBDC development projects around the world. Partner at Shearman & Sterling, Barnabas Reynolds therefore looked into the future confrontation between central bank currencies and cryptocurrencies. He was particularly interested in the impact of CBDCs on the traditional economy and their adoption on a global scale.
CBDCs pose a threat to the traditional banking model
In his analysis, Mr. Reynolds recalled that banks are essentially mature transmission entities. In other words, they are at the heart of an economic model where they borrow short term and lend long term. He explains that this model could be called into question by the CBDCs since they are not fungible, unlike trusts. According to him, everything will depend on the choice of consumers as to the use that will be made of their CBDCs by the banks.
” Owners of CBDCs might expect them to be protected and not loaned, which would threaten the ability of banks to lend as much as they currently do. Consumers may be willing to have their CBDCs on loan, but the question remains open and interest rates could be high. All of these challenges can of course be addressed, through trade adjustments, updates to terms and conditions and broader regulations.“, did he declare.
CBDCs are called upon to coexist with cryptocurrencies
Based on the fundamental differences between cryptocurrencies and CBDCs, Reynolds believes the two currencies can coexist in the same economic system. He recalled in particular that cryptocurrencies are appreciated by the public for the anonymity they confer to their holders and the decentralization model that supports them. While CBDCs don’t offer the same guarantees, Reynolds believes they have a card to play.
In particular, he noted that they have the potential to reduce transaction costs and speed up cross-border transactions in the same way as cryptocurrencies. Mr. Reynolds thinks, moreover, that CBDCs could have the added benefit of controlling money flows in times of crisis, which could have a stabilizing effect on the economy. According to him, this aspect should allow CBDCs to generate more consumer confidence.
Cryptocurrencies or CBDC: which choice for small nations?
Despite the willingness of several governments to pit CBDCs against cryptocurrencies, Reynolds points out that smaller nations might be tempted to adopt bitcoin like El Salvador. He explained that adopting a cryptocurrency requires much less infrastructure than developing a CBDC. The difficulties encountered by Nigeria with the e-naira are moreover a perfect illustration of this. However, Mr Reynolds believes the trust should retain the preference of governments and consumers for large-scale use.
“Small countries with healthy and well-functioning economies may not want to expose themselves and wait for the big countries to lead the way. As it stands, cryptocurrencies, while obviously arousing great interest in their potential use, are not yet threats to the traditional economy. Money is so central to our lives that most people are naturally conservative and cautious about its coming in a new form.», He concluded.
While banks should fear the widespread adoption of CBDCs and their use by consumers, cryptocurrencies would not have anything to fear immediately. The development of CBDCs could, on the other hand, constitute a huge challenge for small nations, especially as the major powers continue to be cautious on the subject.