CBDCs present central banks with a trade-off between risks and rewards: Fitch
The ability for funds to flow quickly into CBDC accounts could lead to credit strains at some banks and drive up interest rates.
Fitch Ratings has released a new paper outlining the trade-offs between risks and benefits that authorities would be presented with if general-purpose CBDCs were widely adopted.
The paper asserts that the main advantages of retail CBDCs lie in their potential to enhance government-guaranteed cashless payments with innovations in line with the wider digitization of society. For central banks in some emerging markets, CBDCs present an opportunity to integrate underbanked communities into the financial system, while improving the cost, speed and resilience of payments, says Fitch.
CBDCs also offer a way to address challenges posed by declining cash usage and help erode the monopoly some digital payment systems enjoy over payments-related data. They could also improve the ability of central banks to track data on financial transactions, thereby contributing to the prevention of financial crime.
The document also notes that CBDCs may open up new policy options, such as transfers to CBDC accounts as part of disaster relief or recovery efforts.
“The programmability of CBDCs offers other possibilities for flexibility, including the potential to influence social behavior,” the document states. “However, combining such functionality with CBDCs may make them less appealing to users, compared to cash.”
CBDCs that offer less privacy than cash or strongly cap amounts held in e-wallets can also act as a deterrent to adoption.
Regarding the risks associated with CBDCs, the paper highlights the possibility that funds flow quickly into CBDC accounts, leading to financial disintermediation between deposits and the banking system. This could exacerbate credit pressures at some banks and drive up interest rates.
“The likelihood of this happening can be reduced by adjusting the design of the CBDC and CBDC ‘portfolios’ (accounts), but it can also discourage adoption,” says Fitch.
Additionally, heightened cybersecurity threats may emerge as more points of contact are created between the central bank and the economy.
The complete document is available here.