CBDCs could put banks’ profits at risk, as per this report

• Emerging CBDC cross-border transaction technology can put the banks’ profits at risk, as per a new Moody’s report.
• Cross-border CBDC transactions would require entirely new infrastructure, reducing the role of banks even further.

Emerging central bank digital currency (CBDC) cross-border transaction technology has the potential to transform the global economy by making services for many of its participants faster, cheaper, and safer.

However, banks may not fare very well in the new economy, as per a report published yesterday (23 March) by Moody’s Investor Service.

Most studies underline the important intermediating role of the banks in the domestic use of CBDCs. But the latest Moody’s report suggests that cross-border CBDC transactions would require entirely new infrastructure, reducing the role of banks even further.

According to the report, banks would also benefit from the new technology.

The risk of the settlement could be reduced or eliminated. In fact, banks would be able to make, clear, and settle cross-border payments at low cost within seconds, eliminating the need to sign up for multiple payment systems or rely on correspondent banks in other countries.

But it is the same set of technologies that could possibly reduce banks’ profits from payments, correspondent services, and foreign-exchange transactions as the role of CBDCs grows bigger. It could completely wipe out the role of correspondent banks in the process.

Banks may require a new infrastructure to support CBDCs

Banks may have to build the infrastructure required to support CBDC interoperability at scale, putting a strain on resources in the short term.

Interoperability for both retail and wholesale CBDC is being worked out in experimental projects, often with the participation of the Bank for International Settlements.

To make their CBDCs interoperable, central banks may need to compromise on some decision-making. Otherwise, small groups of countries could form “digital islands” that would only transact with one another, leaving out a large number of countries.

This Moody’s report has come out at the same time as a U.S. Treasury report detailing the potential effects a CBDC could have on the domestic banking system.

Fully integrating a CBDC into the economy would destabilize banks. There is a risk of systemic deleveraging, that is, a reduction in banks’ equity, leading to reduced stability in times of crisis after the introduction of a digital currency.