One of the world’s largest credit rating agencies believes that central bank digital currencies (CBDCs) could disrupt the current financial systems. In its latest report, Fitch Ratings looked into how CBDCs could impact the global financial system, including giving governments a new way to track financial data and new financial policy options.
Several central banks around the world are looking at CBDCs. Some like the Bahamas have already launched their sovereign digital currencies while others like China are in advanced development stages. Yet, others like the U.S. and the U.K. are still exploring the feasibility of a CBDC and what effect it would have on the financial system.
According to Fitch Ratings, there will be risks and benefits, and central banks will have to make trade-offs on some for the others. The credit ratings agency, which together with Standards and Poor’s and Moody’s makes up the ‘Big Three,’ believes that at a time when cash payments are declining, CBDCs are critical for central banks to keep their stronghold on the financial system.
“The key benefits of retail CBDCs lie in their potential to enhance authority-backed cashless payments with innovations in step with the wider digitalisation of society,” the New York-based firm stated.
Cash payments have been on a steady decline in most economies globally. With mobile payments becoming faster and cheaper, and mobile phone penetration soaring even in the developing countries, most people are choosing digital payments. In Sweden, a global leader in cashless payments, the share of cash payments stands at less than 1.5%. In China, it stands just below 4%.
Cashless payments are opening new opportunities and powering the digital economy. However, they also present a unique risk—the creation of oligopolies, often from the private sector. This has been a key reason many regulators have rejected the Diem (formerly Libra) stablecoin by Facebook.
Fitch Ratings believes that a stablecoin could enable central banks to avert the creation of private sector oligopolies in the payment sector. “Widespread use of CBDCs could erode these providers’ control over payments-related data and improve central banks’ capacity to track financial transaction data, aiding the prevention of financial crime,” it pointed out.
However, they warned that if the CBDCs fail to offer enough privacy to their users, they may push them away.
CBDCs could also open new policy options, such as direct transfers into CBDC accounts when dispensing disaster relief or stimulus efforts.
In general, widespread CBDC adoption may be disruptive for existing financial systems if the associated risks aren’t managed, the agency stated. Such risks include “the potential for funds to move quickly into CBDC accounts from bank deposits, causing financial disintermediation, and for heightened cybersecurity threats as more touchpoints are created between the central bank and the economy.”
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