Bankers grow concerned as governments around the world rush to digital currencies

• Bundesbank is anxious that the digital euro may do more harm than good.
• Developed countries are too concerned about their banks.
• Global regulators assess risks and benefits in different ways.

The idea of state-backed digital money is gaining traction around the globe. However, neither regulators nor the community clearly understands how it will look like and what are the consequences of this major evolutionary development in the global financial system.

In this article, we look into the global regulators' concerns and try to assess why they are cautious about launching CBDC.

Bundesbank is concerned about digital euro

Burkhard Balz, Member of the Executive Board of the Deutsche Bundesbank, says the digital euro can crash the financial system. 

In a recent speech made for the Bank of International Settlements, the German central banker Burkhard Balz pointed out the risks of introducing the digital euro. He believes that the global central banks should think twice before they launch their CBDC (central bank digital currency) as it may have far-reaching consequences for the whole financial system. 

For example, if the cryptocurrency issued by central banks has characteristics similar to traditional fiat assets, users may start moving their money from banks to CBDC.

What if, in times of crisis, bank deposits were rapidly withdrawn and converted into a digital euro? We call this scenario a "digital bank run." The result could be the destabilization of the entire financial system, he writes.

This development will eventually kill the banking sector that now plays the role of the financial intermediator, and, as a consequence, dampen the provision of bank credit to the economy.

Burkhard Balz believes that the limits to the amount of digital euro held by one person can partially solve this problem. It will also allow regulators to make sure that it is used only as a means of payment.

The demand for a digital euro could also be controlled through incentives based on tiered remuneration. However, I am not so sure whether incentives could, in reality, prevent a digital bank run. Therefore, the technical implementation of CBDC would need to be thoroughly thought over and tested, he added.

Notably, the Deutsche Bundesbank is deeply involved in the discussions on CBDC. The regulators are looking for solutions that will help use digitalization benefits and overcome the risks related to CBDCs.

As the FXStreet previously reported, the European Central Bank (ECB) has launched public discussions on the risks and benefits of the digital euro. The regulator plans to decide on it by the middle of 2021.

Europe and the US cling to banks too much

Julie Monaco, the global head of Citi's Public Sector Group, believes that many countries in the developed world lag behind China when it comes to the launch of CBDC because they what to keep the role of banks in the global financial system. They cling to their intermediary function and try to extrapolate it in the digital space. 

Meanwhile, the expert emphasizes that many people, including top authorities, still do not have a clear understanding of the difference between CBDC and cryptocurrency. At the same time, the benefits of CBDC depends exclusively on the purpose of the asset.

Thus, Julie Monaco believes that digitalization of the economy allows to increase the tax receipts and reduce the expenses at the same time. Moreover, it is a perfect tool to monitor cash flows and combat misappropriations, frauds, money laundering, and other illegal financial activities. 

Other central banks are skeptical too

Bundesbank is not alone in its skeptical and somewhat cautious approach towards digital assets. Thus, the US regulator believes that American society is comfortable with the payment options they have, making the state-backed cryptocurrency more like an option than a necessity. 

Speaking in the recent discussion panel with IMF's chief, the head of the FED, Jerome Powell, noted that while CBDC may supplement the existing system, provided that the authorities find the way to address the risks related to the digital currencies. 

The Canadian central bank recently published a report where it outlined the threats associated with CBDC. The authors of the report elaborated on the "Not your keys, not your crypto"  idea, saying that inexperienced users would turn to third-party service providers to manage their cryptocurrency keys of store assets. 

In this case, the central bank may find itself liable for monetary loss due to weak customer protection on the intermediaries' side.  The Bank of Canada has been working on its CBDC since February. However, the regulator would turn to the new form of money only when the cryptocurrency popularity gains traction. 

Russia is another country with a lot of suspicions and concerns.  The Prime Minister of the Russian Federation, Michail Mishustin, recently said that cryptocurrencies pose a threat to all financial institutions, including central banks. He also added that global digitalization reached the point where large corporations threaten the countries' regulatory framework.

Meanwhile, the central bank of Russia has also launched public discussions on the crypto ruble.

CBDCs are upon us

Naturally, different countries have different views on CBDC, its risks, and its benefits. When considering the launch of the state-backed digital asset, the regulators consider the maturity of their financial and banking system, the popularity of cash, and the payment needs. 

China is currently leading the pack as the country has already launched a pilot project of digital yuan and even airdropped 10 million tokens to Shenzhen citizens. The promo campaign was a big success as users made over 62,000 transactions with digital yuan worth $1.3 million in just one week.

Meanwhile, the cryptocurrency community believes that CBDCs are a question of when not if.  Moreover, introducing state-backed digital money will lead to a significant overhaul of the global financial system.  Read more details here.