Central bank digital currencies (CBDCs), according to one of the world’s largest credit rating agencies, have the potential to disrupt existing financial structures. Fitch Ratings examined how CBDCs could affect the global financial system in its most recent study, including how they could provide governments with a new way to monitor financial data and new financial policy options.
Many central banks around the world are studying CBDCs. Some countries, such as the Bahamas, have already launched their digital currencies, while others, such as China, are still in the early stages of growth. Others, such as the United States and the United Kingdom, are also researching the viability of a CBDC and its effect on the financial system.
According to Fitch Ratings, there will be costs and advantages, and central banks will have to make trade-offs on some for the sake of others. CBDCs are important for central banks to maintain their stronghold on the financial system, according to the credit ratings agency, which, along with Standard and Poor’s and Moody’s, makes up the so-called “Big Three.”
“The key benefits of retail CBDCs lie in their potential to enhance authority-backed cashless payments with innovations in step with the wider digitalization of society,”the New York-based firm stated.
In most economies around the world, cash payments have been steadily declining. Most people are opting for digital payments as mobile payments become quicker and cheaper, and mobile phone penetration rises even in developed countries.
Cash payments account for less than 1.5 percent of total payments in Sweden, a world pioneer in cashless payments. It is currently just under 4% in China.
The digital economy is being fueled by cashless payments, which are creating new opportunities. However, they pose a particular threat: the emergence of oligopolies, mostly from the private sector. This is one of the main reasons why many regulators have rejected Facebook’s Diem (formerly Libra) stablecoin.
According to Fitch Ratings, a stablecoin may help central banks avoid the formation of payment oligopolies in the private sector.
“Widespread use of CBDCs could erode these providers’ control over payments-related data and improve central banks’ capacity to track financial transaction data, aiding the prevention of financial crime,”it pointed out.
However, they did warn that if CBDCs do not provide adequate privacy to their users, they can be pushed away.
CBDCs may also open up new policy options, such as directing disaster relief or stimulus funds directly into CBDC accounts.
In general, if the associated risks aren’t controlled, widespread CBDC adoption may be detrimental to existing financial structures, according to the agency. Risks include the potential for funds from bank deposits to move rapidly into CBDC accounts, causing financial disintermediation, as well as increased cybersecurity threats as more touchpoints between the central bank and the economy are established.