Citi: While offering benefits, CBDCs threaten more competition, big brother practices

By Andrei Skvarsky.

Citi warns that, along with major technical and social advantages, there are potential serious downsides to central bank digital currencies (CDBCs), an electronic form of national currencies that more than 100 central banks are developing.

One problem is that transactions in CBDC may force central banks to compete with private companies that manage habitual forms of payment, according to a Citi report entitled “Money, Tokens, and Games: Blockchain’s Next Billion Users and Trillions in Value”.

Loss of privacy is another hazard. Unlike conventional money operations, transactions in CBDC will not be anonymous, although Citi suggests dealing with this problem by making payment data visible only to intermediaries such as banks or payment companies rather than automatically to central banks.

One more problem is that potential preference for CBDC formats would deprive commercial banks of customer deposits. Banks may try to fill the gaps with wholesale financing, but that is costlier than funding through client deposits, and hence lending rates would go up, Citi argues.

The potential decline in depositing might, moreover, harm monetary policies by undermining the intermediary role of banks, and therefore the European Central Bank and the Bank of England are considering limits on CBDC ownership. The former suggests a limit of 3,000 euros and the latter a cap of between 10,000 and 20,000 pounds.

The expected benefits of CBDCs include promotion of financial inclusion and more efficient domestic payment systems, which, according to Citi, are the top motivations for CBDC adoption among emerging markets and developing economies.

Also, a CBDC may be used as a nationwide interoperable payment instrument unlike private forms of digital money that create closed loops, preventing cross-system transactions and restricting the interconvertibility of different forms of money.

CBDCs would, besides, be fungible and could be used by commercial banks as collateral for borrowing unlike bank reserves held at central banks, which are non-transferable and hence non-fungible.

So far only three countries – Nigeria, the Bahamas and Jamaica – have officially launched CBDCs. China piloted a CBDC in 2020.

Citi says that Japan, India and the United Arab Emirates have also reached piloting stages and that the European Central Bank and the central banks of India and Britain have been making plans to launch CBDCs before the end of the decade.

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