The race toward bitcoin and cryptocurrency-inspired digital currencies, kick-started by Facebook and China, is moving up a gear—and Wall Street’s biggest banks are beginning to feel nervous.
“Our job is not to protect bank business models,” Bank of England deputy governor Jon Cunliffe warned last week, arguing banks around the world will “have to adjust” to a future where central bank digital currencies (CBDC) may severely reduce the how much cash is stored in bank accounts.
While Facebook’s ambitious plans for its libra cryptocurrency were torpedoed by governments and regulators around the world, nervous that the social media giant’s influence could destabilize monetary policy, China’s digital yuan is already being rolled out—forcing the U.S. Federal Reserve to seriously consider creating a digital dollar and inducing consternation on Wall Street that banks might be facing an existential threat.
“Certain implementations of central bank digital currencies could be understood as disintermediating commercial bank activities,” said Nic Carter, a venture capitalist and chairman of crypto asset market data company Coin Metrics.
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“Retail CBDCs, for instance, could massively increase the ratio of base money to m1 [total currency in circulation]. All of the electronic money we interact with is commercial bank liabilities, if we can get accounts directly at the Fed then that cuts banks out of the picture.”
It’s thought a digital dollar or euro would work just like regular coins and notes issued by central banks but exist entirely online—with central banks such as the Fed distributing cash via apps and online accounts instead of by printing notes and minting coins.
Earlier this year, the creation of a digital dollar to help distribute stimulus funds across the country was floated by U.S. lawmakers but didn’t make it to the final draft of the coronavirus stimulus bill.
Meanwhile, almost all major central banks are now thought to be engaged in CBDC research, with European Central Bank president Christine Lagarde suggesting it could launch a digital version of the euro in the next two to four years.
Last month, former JP Morgan executive and now executive chairman of digital asset management firm CoinShares, Daniel Masters, told Forbes that CBDCs could cause commercial banks as we know them to “cease to exist”—with blockchain-powered decentralized finance (DeFi) replacing them.
On top of central bank plans to digitalize currencies, banks are also struggling with the lingering effects of the 2008 financial crisis that have been significantly exacerbated by the coronavirus crisis.
“Central bank digital currencies will force banks to offer better interest rates to savers,” said economist and financial author Frances Coppola. “That’s a good thing for savers, but for banks means a further squeeze on profits already depressed by low interest rates and quantitative easing.
“There’s also potentially a financial stability problem if banks start to rely more on market funding than retail deposits. Regulators might lean on banks to make greater use of central bank lending facilities.”
“Banks are already on the back foot,” Carter added. “Negative rates mean that all the businesses based on net interest margin are effectively obsolete.”
Carter is optimistic, however—and thinks that bitcoin, with its fixed supply of 21 million tokens, may provide an unexpected lifeline for banks.
“Bitcoin is an asset which energizes banking, in my opinion, rather than cutting banks out completely,” Carter said.