Central Bank Digital Currencies CBDCs
While in the past, the crypto market industry has been solely operated by the private sector, the industry is now attracting the public-sector – central banks.
The recent developments in the crypto market such as fakebook’s libra project tokens and stable coins (cryptocurrencies collateralised by fiat, gold, or combination of financial instruments) could result in increased use of stablecoins (private coins) and less use of central banks’ fiat currencies. Central banks are concerned that a decline in the demand for banknotes could reduce the importance and power of central banks in the monetary system and could result in loss of monetary sovereignty and ability to affect monetary policy.
To tackle these threats and to preserve their role in the monetary system, central banks consider issuing their own digital currency that is available to the end-user, a retail CBDC. Central banks around the globe are exploring the possibilities of issuing their own digital currencies. According to BIS (Bank for International Settlements) report, 80% of central banks are working on CBDC projects. Countries such as China have already launched their CBDC for testing.
Same as private coins, the introduction of CBDC could lead to disintermediation of the banking sector resulting in higher refinancing costs for commercial and could threaten commercial banks’ liquidity and their business models. Therefore, these revolutions could disrupt and challenge banks’ profitability. Thus, it is crucial to recognize the benefits, risks and impacts of such initiatives to estimate the expected impact on banks and to discuss proper regulatory responses beforehand.
While CBDCs serve different needs of financial institutions and citizens in different nations, there is a need for CBDCs which meet global standards that guarantee interoperability between different countries’ CBDCs.