Analysis: Digital Competitors? Central bank e-cash plans are attracting lenders to jump in

LONDON (Reuters) – As central banks dig into digital currencies, commercial lenders step up efforts to influence political and technical plans, according to more than half a dozen industry executives and public records.

Concerned that the cryptocurrency explosion could weaken their impact on the economy, monetary policymakers from Washington to Beijing are considering issuing their own central bank digital currencies, or CBDCs.

Although a widespread digital dollar, euro, or yuan may be years away, such projects threaten to disrupt the financial services industry and move banks to act.

“CBDCs are starting a debate about the essence of money, which could have a huge impact on almost everything we do from securities settlement to settlement,” said Swen Werner, managing director, digital assets, State Street.

Depending on how they are structured, the CBDCs could see central banks and technology companies competing in the retail banking business and at the same time offer established providers opportunities to reduce costs and improve services.

In contrast to cryptocurrencies, which are typically operated by private actors, or electronic money, which is used for billions of transactions every day and which is mainly created by commercial banks, some CBDCs would be equivalent to cash that is issued and supported by central banks.

State Street, Goldman Sachs Group Inc, JPMorgan Chase & Co, Societe Generale, and HSBC are among the banks interested in shaping and taking advantage of CBDC technology.

Lenders are funding research, partnering with technology companies and central banks on pilots, and stepping up lobbying, according to executives and public records.

You also work on the topic through trading groups such as the European Banking Federation (EBF) and the US Chamber of Commerce, as well as in private conversations with policy makers.

The effects of the CBDCs are “worrying”, said the EBF in an email and added: “Given the potentially far-reaching effects of the digital euro, the EBF is interested in a more structured dialogue with the European Central Bank and European banks.” to work closely together on this project. “

WHOLESALE OPPORTUNITIES

CBDCs can take one of two basic forms, wholesale or retail. Wholesale digital coins could be used to make payments between banks or other entities with central bank accounts, using distributed ledger technology to make the process easier and cheaper.

HSBC and Standard Chartered are already working with central banks in Hong Kong, Thailand and the United Arab Emirates to use CBDCs for wholesale cross-border payments, which is currently a lengthy process involving multiple intermediaries. Citi and JPMorgan are among the banks making similar efforts in Singapore.

Ultimately, such projects could enable companies to securely make payments across jurisdictions in real time.

HSBC CEO Noel Quinn told Reuters in May that CBDCs could simplify global payments, reduce costs and increase transparency. HSBC is speaking to governments like the UK, China and Canada about its digital cash initiatives, he said.

CBDCs could also make securities trades – which can take days with multiple parties involved – more efficient to process, executives said. A CBDC could be programmed with instructions to provide security immediately upon receipt of the digital cash.

London-based Fnality, a startup backed by 15 financial firms, is awaiting regulatory approval for a blockchain-based system that would streamline settlement between financial institutions.

And the first thing Goldman Sachs said last month was it had a repo trade on JPMorgan’s private blockchain network.

CONCERNS IN RETAIL

However, incumbents are concerned about a potential retail CBDC that will dispense digital coins directly to consumers.

Proponents say that millions of people excluded from the financial system could make it possible to get, spend and save money through a digital wallet.

Retail CBDCs could improve government services and reduce fraud. For example, pandemic aid could have been provided faster and more cheaply than retail CBD, which can only be used for eligible expenses.

But such a model runs the risk of exploiting bank deposits, a major source of cheap finance, and associated fees. Morgan Stanley said last month that a digital euro could soak up 8% of euro area banks’ customer deposits.

The Bank of England has also warned that a major switch to digital currencies, including CBDCs, would drive up funding costs and raise banks’ interest rates.

“If central banks compete for the money people can hold, it could lead to fewer commercial bank deposits,” said Isabelle Martz, associate director of retail payments at Societe Generale.

“That could have an impact on the financial viability of the economy.”

The EBF has urged central banks to avoid CBDCs that would compete with deposits by serving as savings and investment vehicles. The US Chamber of Commerce has also warned against crowding out innovations from the private sector.

But this scenario is considered extreme and central bankers have stated that they want to keep the role of commercial banks.

“People are realizing that private sector involvement is critical,” said Mathew McDermott, Goldman Sachs global head of digital assets.

Policymakers could expand the types of private companies that CBDCs are allowed to issue to retail customers to increase competition. China, for example, has allowed fintech giant Ant Group to take its CBDC test.

Some industry groups are pushing for non-banking novices to undergo the same regulatory scrutiny as banks and for the private sector to have a greater say in political discussions.

For example, the US Chamber wants the White House to set up a task force that includes the government, the private sector and academics to help shape the US CBDC strategy.

“We are in various discussions to bring some ideas to the table and to work with Congressmen and regulators to get them together and develop the right guidelines,” Tom Quaadman told the Chamber.