Central bank digital currency disruption

The increased adoption pace of digital technologies is forcing countries to adapt Central Bank Digital Currencies (CBDCs).

This has made many decision-makers to set up mechanisms for change in the past five months. A move that will completely disrupt the financial systems.

A special report by Fitch Rating insinuates that the rise of private digital payment platforms with strong network effect could “create oligopolies among payment-system providers.”

Private companies could end up controlling so much of individual personal data, a concern that has been raised within the academic circles.

Indeed, some governments are also not comfortable with the power of data analytic that these platforms are building around personal data.

The US, for example, belatedly stopped Facebook from launching its own cryptocurrency, Libra, for fear that it could undermine the importance of the dollar in the world trade.

China, too, had its own problems with Alibaba’s Ant Group and Ten Cent’s WeChat Pay. The two platforms control 90 percent of China’s payment space.

It is perhaps the only country that foresaw the growing influence of these platforms on people’s lives and the possibility of creating a parallel currency in crypto. This perhaps explains why the country had to fast-track the release of the e-yuan.

The recent report by Fitch Rating indicates that one of the key benefits of retail CBDCs lies in their potential to enhance authority-backed cashless payments with innovations in step with the wider digitalisation of society.

The report further reveals: “The widespread use of CBDCs could erode these providers’ control over payments-related data and improve central banks’ capacity to track financial transaction data, enabling the prevention of financial crimes such as money laundering”.

In some developing countries, CBDCs are seen as a major opportunity bringing the unbanked communities into financial systems and also “improve the cost, speed and resilience of payments.”

However, a recent report, The Impact of Cryptocurrency Adoption on Government by the Government Blockchain Association shows that blockchain used in CBDCs offers more benefits than previously thought.

This is in relation to the fact that this emerging technology could support public transparency and trust, improve accountability, promote innovation to foster technical and business efficiencies and provide value-added services previously unavailable to the public.

Could the benefits that blockchain is bringing be a risk to CBDCs? The simple answer is yes. The Economist of May 8 issue front page that reads: Govcoins (CBDCs): The digital currencies that will transform finance explains it clearly.

In its editorial, it argues that in spite of the fact that CBDCs have put more than $1.7 billion in people’s pockets through cutting operational cost, it is likely to destabilise banks if customers decide to keep their money in central banks.

In essence banks would have to find other financing sources to back their loans.

And sucking money out of the banks could undermine business creation and shift the power to bureaucrats to influence credit. Above all, CBDCs could alter geopolitics by providing a cross border payments and alternatives to the dollar, “the world’s reserve currency and a linchpin of America’s influence.”

But some economists are dismissing CBDCs as unworkable since they are likely to increase the interest rates on loans by the banks.

Their argument is based on the likelihood of the banks being forced to raise interest rates on deposits from individuals and organisations for which central banks provide direct alternative.

However, some of these details have not been dealt with. Many governments are still studying how all these changes may affect the banking industry. But the transformation journey is on.

The least we can do is to start preparing for an almost certain future.