Central bank digital currency would disrupt banks’ business model: Moody’s
Central banks globally have launched consultations and pilot projects on creating a digital form of cash (central bank digital currency of CBDC), catalysed by Facebook’s Libra project. CBDCs could have an advantage relative to digital stable coins such as Libra, providing rapid and convenient means of payment but with a direct claim on the central bank. Spurred by Libra’s plans, central banks in China, Sweden, UK, the euro area and US have launched studies into the process.
CBDCs could take several forms, explained Moody’s latest research. This “direct” CBDC model envisages individuals or companies having a direct but electronic claim on the central bank itself. But it could make the central bank responsible for managing retail payments, including all the administrative tasks such as “know your customer” and anti-money laundering procedures. An “indirect” model would relieve central bank of the administrative burden of payments with the private sector playing an intermediary role, like Libra, for instance. The hybrid model combines the direct and indirect models.
Moody’s pointed out that digital currency could have profound consequences for banks. CBDCs would bring downsides, however, as some forms of digital currency would disrupt commercial banks’ business models, said Nick Hill, managing director – Banking at Moody’s Investors Service. “The role of banks in the payments system would be displaced, and there would be disruption to their funding models too,” said Hill. Even if the bank would adopt the less disruptive hybrid model, it is likely to impose new costs on banks and reinforce existing pressures on its business models.
The ongoing digitalisation trends that have accelerated during the coronavirus pandemic are a long-term threat to physical cash and CBDCs could be a response to this pressure, according to the research.