Central Banks Digital Currency (CBDC) – Inevitable Banking Disruption Round the Corner

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Digital Technology has been driving innovation and disruption in the banking sector and there is a perceivable shift in the way we experience banking today. New products (Paytm – wallets), services (payments – UPI), experience (swipe banking – app based) is made possible by new entrants, fintechs leveraging existing backbone and networks of the banks. Wallets, payment services depend on linking traditional banking to offer their services. In that sense new offerings are more complimentary than disruptive. This could change with Central bank issued Digital Currencies.

In light of several digital currencies issued by private players and commercial banks, there are several experiments in this space being conducted by central bank’s in collaboration with institutes (for e.g. MIT) or otherwise to launch their on digital currencies. Central bank’s of more than 14 countries including China, US, India are spearheading their effort in this space.

CBDC will be a digital currency issued by central bank (Like cash) with unchanging unique identifier. Unlike digital currencies issued by a commercial bank or any other player, CBDC’s are the liabilities of the central bank. So it is backed by Government of the nation.

What could change:

• Account opening with the Central Bank

The Central Bank can technically allow wallets (open accounts) to be created directly with it rather than with the commercial banks. So anybody with an app and Aadhar can open an account with the central bank. Benefits could be directly deposited into the central bank issued wallet. The cost of issuance and distribution of cash will be eliminated. Since this digital currency is sovereign backed it is as safe as it can get (no run-ins on the bank).

• Deposits business would loose its sheen for banks

Bank’s traditional avenue of business, deposits, would not be the key focus unless the Central Bank decides not to give interest rate on time deposits or bank’s decide to give more interest than the Central Bank. Bank’s role as a custodian of cash will diminish significantly. This will also open up space for Fintech’s and innovative players as the entry barrier would not be there.

• New ways of Banking

Traditional bank’s would have to focus on lending business with smarter way to deliver and manage money. Bank’s  ability to source right loans, price it right and deliver the wallet efficiently will be key to success.

• Easier to Monitor and Regulate

Central bank would have the upper edge in monitoring the transactions and imposition regulations as it would not be depended on the submissions from the bank. It would also have visibility of the transactions.

Central Bank backed Digital currency launch is imminent. It may take sometime for it to stabilize and adopted and even more time to become a mode for cross border settlement but it has the potential to disrupt the status quo of the banks.

Resources:

IBM Banking Financial Markets