In 2022, the share of central banks engaged in some form of work on central bank digital currencies (CBDCs) rose to 93%, according to the Bank for International Settlements. The Bahamas, the Eastern Caribbean, Jamaica and Nigeria have all issued a live retail CBDC already.
However, CBDCs sometimes raise doubts, and even fears, among commercial banks, as acknowledged in a speech by Bank of France governor François Villeroy de Galhau.
CBDCs could compete with banks in providing payment balances and services, potentially causing a reduction in deposit and credit creation.
The main concern for banks is that households might end up preferring risk-free CBDCs over bank deposits, which represent a stable and cheap source of funding for lenders. There will be consequences for banks’ ability to meet their prudential requirements and extend loans to the economy at certain prices.
The lack of deposits will inevitably change the liability side of the bank balance sheet.
“What you want is that the banks can basically maintain their business model as it was. You don’t want to interfere in any way with what the banks are doing on the asset side of their balance sheet,” said Dirk Niepelt, leader of the Centre for Economic Policy Research’s Policy and Research Network on FinTech and Digital Currencies, during a joint conference with the European Central Bank (ECB) in November.
How to neutralise CBDCs’ impact on the real economy
Central banks have a lot of leeway to neutralise CBDC effects on the real economy. It remains to be seen if CBDCs might result in a substantial loss of deposits for financial institutions. Customers might decide to stick with what they know and are familiar with. The current evidence suggests that despite the variability of interest rates offered on instant-access accounts by different banks, most households tend to remain with their current providers.
But if this remains the case, central banks can regulate how attractive a CBDC might be for consumers by offering non-interest-bearing CBDCs, for example.
When CBDCs and deposits are perfect substitutes, the central bank can offer loans to banks at attractive conditions that can offset the potential deposits lost.
Therefore, it could be important that the ECB envisages the digital euro as a means of payment and not as a store of value, suggests the European Banking Federation. This could be achieved by capping the maximum amount of digital euros in circulation.
Do we really need another CBDC?
There is an open debate about the necessity of CBDCs.
The key rationales for a digital euro are preserving the accessibility of central bank money, supporting monetary sovereignty by limiting the primacy of “external” digital assets and finally supporting the “strategic autonomy” of the European continent.
It is not obvious that the world needs a new digital means of payment, says Santiago Fernández de Lis, head of regulation at BBVA.
“Central banks are keen to innovate. They want to create something that is more in accordance with new technologies. However, before taking that step, they have to be very clear about what type of problem they want to address,” he adds.
Among the most plausible reasons to implement a CBDC is the idea Europe should retain ‘strategic autonomy’ from foreign payment-related service providers and credit card schemes, according to Mr Fernández de Lis. However, a central bank digital currency is not the only way to address this issue: the region could opt for a domestic retail payments solution scheme instead, he adds.
There are already payment schemes up and running in Europe, and an initiative to establish the European payment scheme, points out Hilmar Zettler, head of banking supervision and deposit protection at the Association of German Banks.
At the moment the proposals are not focusing enough on the wholesale aspect, which is sensible, but rather on a payment scheme managed by the ECB, according to Mr Zettler.
Focusing on a wholesale CBDC to improve the efficiency of cross-border payments will lead to more efficiency gains rather would than a purely retail CBDC, Mr Fernández de Lis adds.
“We do not think the central bank is the right institution to manage a payment scheme, especially considering it is already handling other partly conflicting functions such as banking supervision and central bank,” Mr Zettler adds.
