Wide adoption of CBDCs would leave banks with negative credit globally: Moody’s

Doaa A.Moneim , Monday 13 Sep 2021

The report comes in the wake of an announcement by the Bank of International Settlements and the central banks of Singapore, Australia, Malaysia, and South Africa that they had started testing CBDCs for cross-border settlements

File Photo: A Moody's sign is displayed on 7 World Trade Center, the company's corporate headquarters in New York. AP

The large-scale adoption of central bank digital currencies (CBDCs) in cross-border payments and settlements would leaves banks with negative credit due to the lower fees and commissions regarding these currencies, especially for the banks that are active in foreign-currency payments, clearing, and remittances, Moody’s said in a recent report.

Moody’s report comes in the wake of an announcement made on 3 September by the Bank of International Settlements (BIS) — a Switzerland-based organisation of central banks — and the central banks of Singapore, Australia, Malaysia, and South Africa that they had started testing CBDCs for cross-border settlements.

The project, called ‘Dunbar’, aims to create a prototype platform for settlements in multiple CBDCs, with the appeal being that they are faster, cheaper, and more secure.

“This is the first time that the BIS and various central banks are testing multiple CBDCs in a single platform for cross-border settlements. This is an important step if CBDCs are to be adopted beyond domestic transactions,” the report pointed out.

On the other hand, the report noted that the revenues that banks generate from cross-border transactions is significant, revealing that banks generated about $230 billion in revenue globally from cross-border transactions in 2019 based on data from McKinsey — a consulting firm.

Moreover, banks in the Asia Pacific region made up about $100 billion of this amount, the largest share globally, with most of the revenue coming from commercial transactions such as bank-to-bank transactions.

Furthermore, banks globally generated about $60 billion in revenue in consumer business in 2019 for cross-border transactions such as remittances, where the banks charge hefty fees, according to the report.

It also added that banks on average charge 6.4 percent on outward remittances, based on the World Bank’s data, with Nigerian, South African, and Thai banks charging some of the highest fees globally.

“These fees will be reduced with the wider adoption of CBDCs,” the report expected.

The BIS expected that the results of the Dunbar project will guide the development of global and regional platforms for more efficient cross-border payments.

It also said in a recent report that over 80 percent of central banks globally are already researching CBDCs.

Furthermore, it stated that CBDCs offer in digital form the unique advantages of central bank money: settlement finality, liquidity, and integrity, considering it as an advanced representation of money for the digital economy.

“The ultimate benefits of adopting a new payment technology will depend on the competitive structure of the underlying payment system and data governance arrangements. The same technology that can encourage a virtuous circle of greater access, lower costs, and better services might equally induce a vicious circle of data silos, market power, and anti-competitive practices. CBDCs and open platforms are the most conducive to a virtuous circle,” the BIS’ report explained.

On the benefits of this type of currencies, the BIS expounded that it could improve cross-border payments and lower the risks of currency substitution.

Yet, CBDCs come with a number of risks; including loss of monetary policy control, privacy and security issues, and the decline of cash as a counterweight, according to a recent report issued by the Business Oxford Group.

“Existing cryptocurrencies can offer a lesson here: there is significant demand for cryptocurrencies as an investment or an asset class to be traded by investors, but their use as a way to pay for goods or services has been far more limited. This could suggest low retail demand for CBDCs as well,” according to the report.



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