Central bank digital currency plans prompt banks to wade in

LONDON: As central banks dabble in digital currencies, commercial lenders are stepping up efforts to influence policy and technical plans, according to more than half a dozen industry executives and public filings.

Concerned that the explosion of cryptocurrencies could weaken their impact on the economy, monetary policy makers from Washington to Beijing are exploring the possibility of issuing their own digital currencies of the central bank, or CBDC.

Although it may still be years before the widely used digital dollars, euros or yuan, such projects threaten to destroy the financial services industry, prompting banks to take action.

“CBDC is starting a debate about the very essence of money, which can have a big impact on almost everything we do, from securities processing to settlements,” said Sven Werner, managing director of digital assets at State Street.

Depending on the design, CBDCs can see how central banks and technology players compete in the field of retail banking services, providing employees with opportunities to reduce costs and improve services.

Unlike cryptocurrencies, which are usually managed by individuals, or electronic money used daily in billions of transactions, which are mainly created by commercial banks, some CBDCs will be equivalent to cash issued and backed by central banks.

State Street, Goldman Sachs Group Inc, JPMorgan Chase & Co, Societe Generale and HSBC are among the banks seeking to develop and benefit from CBDC technology.

Lenders are funding research, teaming up with technology companies and central banks in pilot projects, and stepping up lobbying, according to executives and public records.

They are also working on this issue through trade groups such as the European Banking Federation (EBF) and the US Chamber of Commerce, as well as through private negotiations with politicians.

The consequences of the CBDC are “concerning,” the EBF said in an email, adding: “Given the potentially far-reaching implications of the digital euro, the EBF is committed to a more structured dialogue with the European Central Bank and European banks to work closely together on this project.”

Wholesale trade opportunities
CBDC can take one of two main forms, wholesale or retail. Wholesale digital coins can be used to make payments between banks or other organizations that have accounts with the central bank, using distributed ledger technology to simplify and reduce the cost of the process.

HSBC and Standard Chartered are already working with the central banks of Hong Kong, Thailand and the United Arab Emirates to use CBDC for wholesale cross-border payments, which is currently a lengthy process involving several intermediaries. Citi and JPMorgan are among the banks involved in similar efforts in Singapore.

Ultimately, such projects could allow companies to securely make payments in different jurisdictions in real time.

HSBC CEO Noel Quinn told Reuters in May that CBDC could simplify global payments, cut costs and increase transparency. According to him, HSBC is in talks with governments, including the UK, China and Canada, about their initiatives in the field of digital money.

According to the executives, CBDC can also improve the efficiency of settlements on securities transactions, which can take several days with the participation of several parties. The CBDC can be programmed with instructions for instant security delivery when receiving digital cash.

London-based Fnality, a startup backed by 15 financial firms, is awaiting regulatory approval for a blockchain-based system that will simplify settlements between financial institutions.

And first, Goldman Sachs said last month that it had agreed on a repo deal in JPMorgan’s private blockchain network.

Retail problems
However, employees are concerned about the prospect of a retail CBDC with digital coins issued directly to consumers.

Advocates say that this could allow millions of people disconnected from the financial system to receive, spend and save money using a digital wallet.

Retail CBDCs could improve public services and reduce fraud. For example, pandemic aid could be issued faster and cheaper, since a retail CBDC can only be used for acceptable expenses.

But such a model is fraught with the risk of destroying the banks ‘ deposit bases, a key source of cheap financing, and the associated commissions. Morgan Stanley said last month that the digital euro could absorb 8% of deposits from customers of euro zone banks.

The Bank of England also warned that a major transition to digital currencies, including CBDC, will lead to increased financing costs and higher interest rates charged by banks.

“If central banks compete for money that people can hold, it could mean a reduction in deposits at commercial banks,” said Isabelle Martz, deputy director of retail payments at Societe Generale.

“This may affect the ability to finance the economy.”

The EBF called on central banks to avoid CBDCs, which would compete with deposits, acting as savings and investment instruments. The US Chamber of Commerce also warned against crowding out private sector innovations.

But this scenario is seen as extreme, and central banks have said they want to retain the role of commercial banks.

“People recognize that private sector involvement is key,” said Matthew McDermott, global head of digital assets at Goldman Sachs.

Politicians could still expand the types of private companies that are allowed to issue retail CBDCs, increasing competition. China, for example, has allowed fintech giant Ant Group to join its CBDC trial.

Some industry groups are pushing for non-bank participants to be subject to the same regulatory oversight as banks, and for the private sector to have a greater say in policy discussions.

The US House of Representatives, for example, is advocating that the White House create a task force that will include representatives of the government, the private sector and academia to help shape the US CBDC strategy.

“We are participating in various discussions to help bring some ideas to the floor and speak with members of Congress and regulators to get them to come together and come up with the right policies,” said Tom Quadman of the House of Representatives.

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