The widespread development of Central Bank Digital Currencies (CBDCs) is not a forgone conclusion. But their introduction could lead to an existential crisis for banks and payments providers. It is not a topic that they can ignore.
According to the Atlantic Council, only seven countries have launched Central Bank Digital Currencies (CBDCs) currently and approximately 16 countries have active pilot programs. Yet everyone wants to talk about them. And that’s not entirely surprising. Central banks recognize that hard cash is being used less and less. Electronic payments are on the rise. And private digital currencies – like bitcoin – are going mainstream. For Central banks, the rise of digital currencies threatens to disrupt their ability to manage financial stability. It undermines their sovereignty, and it potentially creates massive risks in the banking system. Central banks have little choice but to respond in some way.
Yet the need for CBDCs is still unclear. In a recent speech, US Federal Reserve Board Governor Christopher Waller questioned whether central banks should be in the digital currency business at all. “What problem would a CBDC solve? Alternatively, what market failure or inefficiency demands this specific intervention?” he asked, arguing that “After careful consideration, I am not convinced as of yet that a CBDC would solve any existing problem that is not being addressed more promptly and efficiently by other initiatives.”
Many central banks – and the Bank for International Settlements (BIS) – are keenly aware of the risks of creating CBDCs. The BIS notes in a recent paper that “Regardless of the design, developing and running a CBDC system would be a major undertaking for a central bank.” The Bank of England notes that the creation of CBDCs could have significant implications for “how the Bank implements monetary policy and supports financial stability.”
Perhaps not surprisingly, most central banks are hedging their bets. With the exception of China – where the government seems committed to creating and commercializing a digital yuan – most central banks are being very clear that their current discussions are merely exploratory. “The Bank has not yet made a decision on whether to introduce CBDCs,” states the Bank of England paper. The BIS (which represents 60 sovereign central banks) notes that “To date, none of our jurisdictions has yet decided to proceed with a general purpose CBDC.”
An existential crisis in the making
The value of CBDCs is in question. And few central banks (again, outside of China) seem committed to creating them. But that does not make them impossible. Thousands of research papers have been devoted to various aspects of CBDCs. Much effort is being put into understanding the longer-term value of CBDCs in a digital economy. Eventually, I suspect central banks will make some sort of definitive move into digital currencies.
As such, I believe that bank and payments executives will need to pay careful attention to how the debates around CBDCs are evolving. The downstream implications could fundamentally disrupt the current payment and, possibly, banking business models.
Consider, for example, what might happen if a central bank were to create a virtual wallet to enable the exchange and storage of CBDCs; given the perceived safety and security of central bank currencies, it is likely that many consumers and users would ‘park’ their CBDCs into the central bank’s digital wallet rather than in the traditional banking system. The potential impact on lending, investment and capital flow across an economy would be massive.
Or consider the investment and infrastructure implications of an alternate payment system for banks and payments providers. Most central banks have been clear that any future digital currency would sit alongside existing cash options. And that could require banks and payments providers to create an entirely separate, yet parallel, payments infrastructure and processes. The BIS is working to create consistency and interoperability, but should those efforts fail, the impact on cross-border transactions could be significant.
Time to talk
With so much on the line, bank and payments executives have little choice but to get involved. At this stage, most central banks are actively seeking industry participation and public dialogue on the topic. Banking and payments executives would be well-advised to participate in these discussions. For now, the focus should be on assessing the need for CBDCs – perhaps by demonstrating that the current system is still fit-for-purpose in a digital economy. In other words, the focus should be on understanding the value of CBDCs to the public.
At the same time, banks and payments providers should start to prepare for a future that might include CBDCs. Bank and payments executives should be asking what the introduction of CBDCs (in their various potential forms) might mean for their current operations, what risks they might create in implementation and in use, and what opportunities they might enable in the future.
Don’t ignore this
I’ll be the first to admit that staying informed on the evolution of CBDCs is not an easy task. There are thousands of research papers, hundreds of actors and participants, and dozens of central banks talking about the topic in various ways. And the topic is continuously evolving. Few executives will have the time to read everything and talk to everyone.
My advice to banking and payments leaders is therefore to leverage industry associations, talk to advisors and distribute the effort across the executive team. Ultimately, the goal must be to remain informed and engaged. It would be a big mistake to ignore the trend altogether.