Deutsche Bank’s wealth management arm warned Monday that central bank digital currencies have the potential to completely disrupt the financial system, giving central banks more monetary policy tools and significantly changing the role that commercial banks play.
Central bank digital currency is a form of digital money established by governments and central banks with legal tender but without some of the attributes of traditional money — most importantly, it does not physically exist. The idea is a popular one at central banks across the globe; in a recent survey by the Bank for International Settlements, of the 66 central banks surveyed, about 80% said they were engaging in work on a digital currency, though only 10% reported getting as far as pilot projects.
With central bank digital currency, Deutsche Bank Wealth Management said in its report, central banks would be able to bypass commercial banks as intermediaries of policy decisions and reduce policy dilution. If central banks also allowed individuals to open their own central bank accounts to hold the digital currency, Deutsche Bank said the role of banks as “a gatherer of private savings could change significantly.” At the very least, banks would need to offer higher interest rates than the central bank in order to attract savings.
Additionally, central bank digital currency could allow central banks to push rates even lower than the market currently allows by removing the option of holding cash. As it currently stands, an interest rate can only fall so far before investors prefer to hold balances in cash despite the storage costs, insurance and other opportunity costs. However, certain forms of digital currency would remove the cash option, incentivizing investors to spend money now.
For consumers, central bank digital currency is not without concern: Privacy, scalability and regulation are all issues that need to be addressed before currencies become a reality, Deutsche Bank said.
“If consumers can hold their own digital central bank accounts, the role of banks may need to be redefined … and CBDC will also have broader implications for the global economy and international relations,” Deutsche Bank said.
The bank added that as of now, only Sweden and China are actually testing central bank digital currencies, making conclusions about its effects on the financial system nebulous.
Deutsche Bank said, though, that uncertainty over central bank digital currencies is not a reason to avoid the issue.
“Cash still has two great attributes of anonymity and accessibility. … Cash also has two and a half millennia of history behind it,” the bank said. “But, with technological and social barriers likely to be overcome, CBDC may soon become part of our lives — so we need to learn how to use them best.”
Deutsche Bank is not alone in highlighting the potential impact of these currencies. On Friday, the governor of the Bank of France said Europe needs to develop a coordinated strategy on digital currency in order to protect the European financial sector.
“Let me be clear: We cannot allow ourselves to lag behind on CBDC,” said François Villeroy de Galhau at a virtual conference. “That may mean that we create if necessary a retail CBDC, in order to ensure the accessibility of central bank money for the general public, in particular in countries where the use of cash in payments is declining.”