Imagine making payments without internet access, bank cards, or even cash. In the future, blockchain technologies could entirely transform the banking system. Currently, most central bank money is held in commercial banks. Central bank digital currencies (CBDC) can remove the need for intermediaries between central banks and people – a CBDC would give users a direct relationship with central-bank money. This raises the possibility that people could hold their money at the central bank rather than as cash or deposits at commercial banks. The concern is that if deposits migrate away from commercial banks, there could be serious macroeconomic consequences — commercial banks would lose a key source of funding for loans. How will they make money? If basic payments no longer require a bank, will commercial banks need to close?
Although commercial banks’ liquidity risk would increase, the EU plans to limit the impact of a digital euro. To limit this shift, the European Central Bank (ECB) has considered holding limits (often discussed between roughly €500 and €3,000 per user) and a zero interest rate on the CBDC. The aim is for the digital euro to serve primarily as a means of payment, not for savings. It is estimated that with a €3,000 limit, no more than around eight percent of bank deposits could flow out of the eurozone. Overall, the goal of the digital euro is not to replace cash, but to provide a secure, government-guaranteed alternative to private payment systems and cryptocurrencies.
There are opportunities for commercial banks. For example, while the ECB will issue digital euro, commercial banks will provide and manage digital-euro wallets for their clients. They may be responsible for distribution, account management, and customer interaction. They can also provide smartcards for offline digital payments. This means the existing banking system will not be replaced, but rather integrated into the new infrastructure. The digital euro is not expected to be based on a public blockchain, unlike many cryptocurrencies. It is because many processes should not be centralized – for example, validation or offline functions (where small amounts of cash-like digital value could be transferred directly between two devices without the transaction being recorded centrally) – to ensure efficiency and control. Additionally, because cash handling makes up 5-10% of total bank operating costs, banks could reduce costs in the long run. To sum up, banks should not panic about the digital currency; they should begin modernizing their IT infrastructure and look for opportunities arising from digital currencies’ implementation in the monetary system.
It is not only about the digital euro. The Federal Reserve (the central bank of the United States) emphasises deposit protection and states that any CBDC should “complement, rather than replace, current forms of money and methods for providing financial services.” The Bank of England focuses on setting limits for a digital pound and on developing deposit tokenisation (putting customer deposits on the blockchain). The digital yuan’s (e-CNY), currently in pilot, is distributed through commercial banks in China.
There remain many uncertainties about digital currencies, but commercial banks will no longer be just places to store money. Commercial banks should act now to develop strategies to adapt, redefine their role, and identify new services they can offer. For customers, this means that their financial lives will become even more digital, and they will need to improve financial literacy to make more complex financial choices.
–Krišjānis Kristaps Kapustāns