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SEB chief strategist: CBDCs could cause friction with commercial banks

SEB chief strategist: CBDCs could cause friction with commercial banks

Johan Javeus, chief strategist at SEB, tells Finextra Research about the tension that could emerge between central banks and commercial banks should the former circulate a digital currency directly to consumers.

The last few months has seen an array of central banks announce intentions to develop digital currencies, most likely in response to Facebook’s proposed launch of its own stablecoin, Libra.

It would be an understatement to say that the governments, regulators and banks were spooked by the idea of a private company of Facebook’s scale issuing a global digital coin and exerting such influence on the world’s financial system.

However, Johan Javeus believes that central bank digital currencies (CBDCs) would present problems of their own which need to be addressed.

If a central bank was to circulate its digital currency direct to consumers, anybody wishing to use it would have to hold some sort of account with the central bank putting it in competition with commercial banks to hold people’s cash.

“Say the Swedish central bank issues a digital currency,” Javeus says. “Does that mean that every family and business will have an account with the Riksbank?”

This would create an awkward standoff between central banks and commercial banks, which, according to Javeus, could cause a crisis in the financial system.

“Suddenly there is a question of stability in the system,” he adds.

“Of course, everybody will just rush to put their money in the central bank, which would drain capital from traditional banks.”

Without the capital of customer deposits, commercial banks would be less able to provide loan to businesses and mortgages to consumers, which would naturally have damaging knock-on effects on economies.

Centralise or decentralise?

The question though is whether it would be in central banks’ interests to take this approach in circulating its digital currency.

The Bank for International Settlements (BIS) has recently appraised the differing routes that central banks may take in developing and launching a digital currency, describing this direct CBDC or “retail model” as “attractive for its simplicity”, given that central banks would not be dependent on commercial banks as intermediaries.

However, this model requires central banks to build the necessary infrastructure to deal with the regulatory burdens relating to KYC and AML, as well as more rudimentary tasks relating to customer service, system outages and so on.

“This would be a huge project for a central bank to undertake,” Javeus states.

“There are a lot of potential problems that would need to be straightened out, and we don’t know yet how these would be addressed.”

Therefore, it may be more likely that central banks will adopt an approach which uses commercial banks and other intermediaries as conduits for circulating, outsourcing the aforementioned burdens to them in the process.

This 'wholesale model', however, comes with the downside of the central bank being reliant on intermediaries for information relating to individual claims on the currency. This would bring various supervisory and regulatory processes that exist in different forms as part of the system we have at present.

Libra to the rescue?

This being the case, it seems more likely that central banks would follow a ‘hybrid model’ in developing a digital currency, which combines elements of the other two. The BIS proposes that this would involve a central bank distributing the currency, with intermediaries like commercial banks handling retail payments. However, the central bank would periodically record retail balances to exert a greater deal of control than in the wholesale model.

The hybrid model then has the advantage of being simpler for the central bank to offer, but at the cost of requiring a more complex infrastructure. The likelihood is then that central banks would turn to technology companies with the capabilities to provide this.

This may suggest that there is hope for Libra yet. Central banks will be aware that Facebook can deliver the infrastructure required for a digital currency to function at a sufficient scale far better than they can.

“I don’t think central banks have quite decided how they will go about it, because of these potential problems in issuing a digital currency,” Javeus says.

Painful as it may be then, central banks may decide their best bet is to work with Facebook to bring some form or Libra to market and use it as the basis for their own digital currencies.

Javeus adds: “Facebook and its peers are huge companies with resources and know-how at their disposal that far exceed that of any central bank.

“So, if Facebook are able to clear the regulatory hurdles and get the go-ahead to launch Libra, it would be difficult for central banks in any country to compete with such a currency.”

Central banks may then decide that they would rather have Facebook and other Big Tech companies inside the tent spitting out, than outside spitting in.

See the Finextra long read on Libra, CBDCs and more at Welcome to the era of stablecoins

Comments: (4)

Kim Engman
Kim Engman - Tietoevry Banking - The Nordics 31 March, 2020, 10:59Be the first to give this comment the thumbs up 0 likes

Mr. Javeus is not exactly impartial to money issuance and production (hint: It resides with the commercial banks in today's world of digital money). And so, I'd argue that most (any?) commercial bank, would argue against a CBDC.

In this light, let me lend a thought or two on his opinions:

1) Not sure Facebook’s Libra is on the rise anytime soon. Mastercard, Visa and eBay recently left them.

2) Javeus is inferring that CBDCs would entail a [bank-like] account with the central bank. But what if the CBDC is value based? And even if, the account is likely just a registry (and not a bank account per-say).

3) Javeus is claiming that an “infrastructure” could only be developed by Facebook. Really? With all the muscle they do have on SoMe, it is nothing compared to the FS industry's muscles.

4) Finally - well, Facebook? Do we really want to entrust Facebook with our financial data, as well? Have we learned nothing over the years from what drives Facebook (hint: Revenue - to the detriment of public discourse, financial markets, politics, elections, privacy, etc. etc.). Add also, non-existing governmental oversight, thanks to the US government.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 31 March, 2020, 11:45Be the first to give this comment the thumbs up 0 likes

Commercial Banks' fear is justified at first blush. As Tech Review recently pointed out, FedAccounts - the accounts that individual Americans will have directly with central bank Fed - is an IOU from Fed, a sovereign body compared to normal bank accounts, which are IOUs from non-soveriegn private sector banks. People are more likely to trust a sovereign IOU than a non-sovereign IOU, thus causing a transfer of money from private sector bank accounts to FedAccounts. 

However, on deeper analysis, Fed may simply not have the bandwidth to absorb all - or even 50% - of the deposits currently kept at private sector banks. Ergo, this may not be the existential threat to private sector banks and some fear.  

Even within private sector banks we see this issue in another form. Some banks in India offer 4% interest rate on savings accounts whereas others offer 6%. Both categories are sovereign guaranteed via the same amount of RBI-DICGC insurance limit. Still the former cohort of banks has a higher market share than the latter cohort.

At first, many products / services seem like commodities and pundits claim that only price matters, but, in actual practice, many more factors start mattering *after* consumers start experiencing them, and price is no longer the only driver of purchase. 

A Finextra member
A Finextra member 06 April, 2020, 09:15Be the first to give this comment the thumbs up 0 likes

Mr Javeus perhaps takes a starting point from the Swedish Central Bank project on digital currency: Two services,

-a value based servide that holders can carry around in a chipcard or mobile payment wallet, much like the proton purse we saw from Belgium in the 1990ies. Holkders could make payments in stores with this DC in the same terminals that today take bank issued debit- and creditcards... In direct competition with the private bank industry largest by trx volume payment system.

-The other service is an account based service where evey consumer, company and organisation would have an account with the central bank from which you can make real-time payments to somebody else´s central bank account- very much like the bankjing industry credit transfer payment service. Pay-roll deposits go in and oot, receivables and payables payments would be here as well... No need for inter-bank clearing and settlement since it is 100% "on-us" in the central bank. And 100% real time without any TIPS system needed for the domestic SEK payments.

Everybody to hold a central bank account impossible? In Sweden everybody already hold an account with the tax office and it works well and is available via the internet and you also get an "annual stetement"... in the taxation process. 

The public would move all liquid assets - cash deposits - to the CB account for safe-keeping reasons and the CB would then sit on all deposits and manage all retailer shopping payments, and bill payments in society. Workers would ask employers to deposit salaries to their CB account...Banks would neeed to focus on asset management and lending and would get refinancing from the central bank on some kind of commercial terms... A different bank services market than the one we know today. 

Chetan Ghadge
Chetan Ghadge - Wipro - Pune 11 April, 2020, 06:12Be the first to give this comment the thumbs up 0 likes

Not all central banks will disintermediate commercial banks. The Bank of England has clearly said they will not distribute CBDC directly to retail customers but will engage channel partners to do so. Offcourse they didnt say that will partner with only commercial banks but have left the playing field open to all.

Secondly central banks have not yet decided whether CBDC will  be interest bearing. It will go a long way in deciding whether retail customers will prefer to hold CBDC or commercial bank deposits.