Digital currencies are on the rise, with major world economies developing central bank digital currencies (CBDCs) pegged to their national currencies. China has already rolled out the digital yuan, while the US, EU, Brazil and others are piloting CBDCs.
What does this acceleration into digital money mean for traditional banks though? CBDCs may allow central banks and governments to have more control and oversight over money flows. However, they could profoundly impact and even fundamentally threaten the traditional banking model.
Commercial banks have historically had a profitable business – they take in deposits and lend out that money to generate interest income. But what if people no longer need a bank account? CBDCs would allow individuals and businesses to hold government-backed digital money directly with the central bank.
Without deposits, banks have less money to lend out and generate revenue. The availability of digital cash could also trigger instant bank runs in times of crisis. If depositors can instantly switch to guaranteed official e-money with the click of a button, banks may struggle to survive sudden withdrawals.
In essence, CBDCs could slowly chip away at the foundation underpinning the banking system – commercial banks’ custody of citizen deposits and their ability to profit from issuing loans with those funds. Banks may need to offer more competitive deposit rates or value-added services on top of basic CBDCs to entice customer funds.
The impacts could be profound – curtailing the growth ambitions of global banking giants, Triggering consolidation across banking sectors, and providing an opening for non-bank financing alternatives. Entire national banking systems built for the 20th century may need to transform to continue thriving in the 21st.
What role will traditional banks play as central banks and governments increasingly compete with and subordinate them through the digitization of money? Can the rising tide of CBDCs peacefully coexist with private commercial banks? Or will the foundational model of banking face decline?
You can share your perspectives in the comments below. Do you believe the age of CBDCs spells the end for traditional banks over the long run? Or will the banking system adapt to digitization as it has other technological shifts? Participate in the discussion!
As central banks pilot and prepare for mainstream CBDC rollouts, Now is the time for banking institutions and policymakers to seriously contemplate these existential questions. Proactively addressing risks early could make the difference between a smooth transition into a hybrid CBDC-banking system, and a disruptive overhaul of finance.
