Analysis: digital rivals? Central bank e-cash plans spur lenders to get started

LONDON (Reuters) – As central banks grapple with digital currencies, commercial lenders are stepping up efforts to influence policy and technical plans, according to more than half a dozen industry leaders and public documents.

FILE PHOTO: The Bank of England and the City of London financial district in London, Britain November 5, 2020. REUTERS / John Sibley

Fearing the cryptocurrency explosion could weaken their grip on the economy, monetary policy makers from Washington to Beijing are considering issuing their own central bank digital currencies, or CBDCs.

While a widely used digital dollar, euro or yuan may still take years, such projects threaten to disrupt the financial services industry – prompting banks to act.

“CBDCs are launching a debate on the very essence of money that could have a big impact on almost everything we do, from securities processing to settlement,” said Swen Werner, Managing Director of Digital Assets at State Street .

Depending on the design, CBDCs could see central banks and tech players compete in the retail banking space while providing opportunities for incumbents to reduce costs and improve services.

Unlike cryptocurrencies which are generally managed by private players, or electronic money used daily in billions of transactions which is mainly created by commercial banks, some CBDCs would be equivalent to cash, issued and backed by central banks. .

State Street, Goldman Sachs Group Inc, JPMorgan Chase & Co, Societe Generale, and HSBC are among the banks keen to shape and benefit from CBDC technology.

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

They are also working on the issue through business groups such as the European Banking Federation (EBF) and the American Chamber of Commerce, and through private interviews with policymakers.

The implications of the CBDCs are “concerning,” the EBF said in an email, adding: “Given the potentially huge impact of the digital euro, the EBF wants a more structured dialogue with the European Central Bank and European banks. to work closely together on this project.


CBDCs could 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 simpler 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, a currently lengthy process involving multiple intermediaries. Citi and JPMorgan are among the banks involved in a similar effort in Singapore.

Ultimately, such projects could allow businesses to make payments securely in all 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 in talks with governments, including Britain, China and Canada, about their digital money initiatives, he said.

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

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

And as a first step, Goldman Sachs said last month that it settled a repo transaction on JPMorgan’s private blockchain network.


Cardholders are concerned, however, about a possible retail CBDC, with digital coins issued directly to consumers.

Supporters say it could enable millions of people excluded from the financial system to receive, spend and save money through a digital wallet.

Retail CBDCs could improve government services and reduce fraud. Pandemic assistance, for example, could have been delivered faster and more cheaply as a retail CBDC usable only for qualifying expenses.

But such a model risks cannibalizing the deposit bases of banks, a key source of cheap financing, and the associated fees. Morgan Stanley said last month that a digital euro could absorb 8% of customer deposits at eurozone banks.

The Bank of England also warned that a major switch to digital currencies, including CBDCs, would increase funding costs and increase the interest rates charged by banks.

“If central banks compete for money that people can hold, it could mean fewer deposits with commercial banks,” said Isabelle Martz, deputy director of retail payments at Societe Generale.

“It could have an impact on the ability to finance the economy.”

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

But this scenario is considered extreme and central bankers have said they want to preserve the role of commercial banks.

“People recognize that private sector involvement is essential,” said Mathew McDermott, global head of digital assets at Goldman Sachs.

Policymakers could further expand the types of private companies allowed to issue retail CBDCs, thereby increasing competition. China, for example, has allowed fintech giant Ant Group to participate in its CBDC trial.

Some industry groups are pushing for non-bank entrants to be subject to the same regulatory oversight as banks, and for the private sector to have more say in policy discussions.

The US House, for example, advocates that the White House create a task force comprising government, the private sector, and academics to help shape the strategy of the US CBDC.

“We are in various discussions to help put ideas on the table and advocate with members of Congress and regulators to get them to come together and come up with the right policies,” said Tom Quaadman of the House.

Additional reporting by Pete Schroeder in Washington; Editing by Michelle Price and Catherine Evans

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