CBDCs Could Disintermediate in a Structural Way the Banking System.
The European Central Bank (ECB) has published a paper on Central Bank Digital Currencies (CBDCs). CBDCs are the state form of stablecoins – cryptocurrency based off a single asset like the Dollar, Euro or Pound Sterling (or basket of assets either real or synthetic). The paper tackles a topic that has grown in import since the announcement of Libra – Facebook’s attempt to create a non-sovereign global digital currency.
In 1989, the Delors Report (after former EC President Jacques Delors) outlined the steps that would inevitably create a single European currency – the Euro. The Euro was launched as a basket of national European currencies, or unit of account, before the EU stepped off the currency ledge.
Published in April 1989, the Delors Report set out a plan to introduce European Monetary Union (EMU) in three stages. The first was to be controls on capital movements that would be eliminated. The second was an economic convergence between Member States that would be promoted. The third was a common currency and monetary policy that would be adopted. While you may argue about one and two, the Euro became a reality supplanting national currencies like the Deutsche Mark and Franc – a transition that officially commenced with the dissemination of the new currency on January 1, 1999.
Today, the European Union is kicking off a different debate about a common currency. It is the pros and cons of establishing a CBDC that may supplant much of the printed money while streamlining transfer and payment processes. A European CBDC may also have other consequences – at least some of which are discussed in the paper embedded below. While the time from the Delors report to a single currency in 1999 took a decade, it took many years before, as well as years after the first issuance, that saw the Euro achieve the heightened status it holds today.
Two of the risks the ECB paper review are:
“[the] (i) risk of structural disintermediation of banks and centralization of the credit allocation process within the central bank and (ii) risk of facilitation systemic runs on banks in crisis situations.”
Disintermediation of commercial banks may arise when consumers prefer to hold their current accounts with the central bank. So how will traditional banks operate minus deposits?
The disintermediation of commercial banks has been reviewed before – most notably by the Bank of England way back in 2016.
On the positive side, CBDCs may make “available efficient, secure and modern central bank money to everyone, and strengthening the resilience, availability, and contestability of retail payments.”
The Bank of England has established itself as a thoughtful public agency to discuss innovation in financial services. Outgoing Bank Governor Mark Carney has frequently commented on the positives, as well as the challenges of emerging Fintech change. The authors of the paper note that “central banks are not there to ‘put a brake on innovations just for the sake of it’, but to ensure that implications of major changes are well understood so that innovations set the right course for the economy, for businesses, for citizens, for society as a whole.”
The paper is of the opinion that the disintermediation of commercial banks, and the potential for a run, are risks that can be fairly easily managed.
In the end, the authors state:
“From this perspective, this paper may suggest that central banks could be somewhat open to studying CBDC, although the overall business case and the precise risks to change the financial system in a disruptive way deserve further analysis.”
Expect more study and experimentation of stablecoins and CBDCs by central banks everywhere to continue but, similar to the creation of the Euro, a tiered approach to enabling a CBDC may be forthcoming from the European Union.