Commercial banks might not dodge CBDC disruptions
While carefully avoiding anticipating the findings of his new central bank digital currency task force, Sir Jon Cunliffe, Deputy Governor, Financial Stability, Bank of England, declined to worry about the disruption potential that the introduction of the CBDC could cause to UK businesses. banks.
“They have already had to reinvent their business models,” he said at a public conference organized by OMFIF, in response to the idea that the public could transfer their deposits to the CBDC. He pointed out that commercial banks could instead “finance themselves in the capital markets”, although he noted that this could raise retail interest rates.
Banks have a lot more than seniority on their side and can afford to be a little complacent. The People’s Bank of China, which has already set up a CBDC pilot project in several major Chinese cities, has designed its digital renminbi around existing banking and payments infrastructure. While leaving options open for later, the PBoC’s digital renminbi bears no interest and is capped at Rmb3,000 per person. However, PBoC can reduce this during the kind of market turbulence that could cause a rush on banks.
Banks have already co-opted revolutions. Peer-to-peer lending platforms were to be their death 10 years ago. The existing infrastructure also has ready-made answers to regular CBDC puzzles. There are many banks that can easily, albeit quite expensive, transfer money from one jurisdiction to another, while central bank CBDC teams are racking their brains over cross-border interoperability and currency exchange processes. automated.
The question of privacy also seems intractable. It has generated regular punches in discussions with the OMFIF Digital Monetary Institute, including between a large Asian central bank and a London-based bank with major operations in emerging markets. Commercial banks, on the other hand, do not have to answer this question from the outset. People seem to trust them with their data, perhaps because using it isn’t at the core of their business model like social media companies do, for example.
Citigroup pointed out during an OMFIF discussion on the future of payments that banks are also carefully integrated into the regulatory infrastructure relating to anti-money laundering and know your customers’ processes. Distributed ledger technology and blockchain proponents have not provided good answers for this, while citizens seem reluctant to turn their privacy over to new counterparties. Cunliffe, along with other central bankers we’ve spoken to, stressed that politicians will ultimately have to vote on this issue.
Nonetheless, it is clear that central banks believe that commercial banks are overcharging for transaction services and could be disrupted. As Cunliffe seemed to indicate, central banks are reluctant to surrender entirely to private money de facto, as M1 replaces M0 with the contactless payments revolution, which Covid-19 has accelerated.
The most intriguing area containing both risks and rewards for commercial and central banks is the creation of stable coins, issued by non-banks but indexed to national currencies. Cunliffe suggested replacing the British pound with a digital dollar or euro, issued by central banks or tech companies and circulating in the UK, was unlikely, but would not be fired the way regulation might prevent such development. Central European banks are suspicious of a digital euro on this basis. Such concerns may be less of a problem for large jurisdictions with dominant currencies.
Stable coin issuers will likely need to be regulated, with deposits held at the central bank as collateral against the loss of shirts by retail users – and digital savings – in the event the issuer goes bankrupt. It will be a relief for some commercial banks. However, this is starting to bear the remnants of the economically-improving regulatory magic that is fractional-reserve banking, which assumes that banks won’t immediately need to settle most of their liabilities, allowing money to be reused elsewhere.
Being regulated like banks could turn off stablecoin issuers. But if they decide to bother, one of the most important pillars of commercial banking business will collapse. That would leave them creating credit and KYC. Tech companies must surely be able to master the latter, at least.
Cunliffe also pointed out that money âis a social constructâ. The implication is that central banks fear that the public will decide money that is in cahoots with non-banks that offer digital convenience, but do not fully articulate their business models or are not subject to a appropriate regulations. It will be difficult to conceive even if the regulators wish it. In a discussion with OMFIF, the U.S. Securities and Exchange Commission was unable to say whether it or the Commodity Futures Trading Commission should regulate cryptocurrencies.
Cunliffe is clearly open to a potential large-scale disruption of existing structures, although suggested regulators would closely monitor the creation of “walled gardens” that “lock up consumers”. It does not seek to shield commercial banks from state competition or from a deeply radical private sector foray into the design of money.
John Orchard is CEO of OMFIF.