A spate of bank runs and controversies over central bank digital currencies (CBDCs) may further pave the way for tokenized deposits.
The issues surrounding CBDCs are highlighted in a paper issued late last week by economist Ignazio Angeloni and prepared by the Economic Governance and EMU Scrutiny Unit at the request of the European Parliament’s Committee on Economic Affairs (ECON).
The title’s a bit of a giveaway: “Digital Euro: When in Doubt, Abstain (But Be Prepared).”
Per Angeloni’s conclusions, the European Central Bank “should continue its exploration, including a testing phase, but in the end not launch a [prospective digital euro (PDE)] unless new elements emerge strongly supporting such a decision. At the present time, the risks and imponderables of this enterprise are stronger than the arguments in favor of it.”
And delving into those risks and imponderables, the paper noted that a digital euro would put the “ECB in a new position: that of offering a new payment instrument in competition with banks and other payment service providers (PSPs). It is not clear that there is a market niche for a PDE, nor that a PDE would have a good chance of establishing itself in today’s highly diversified, competitive, innovative and fast-moving retail payment industry.”
In a retail setting, the emergence of a CBDC might also spark bank runs because there would be an “easy” and “riskless” alternative to bank deposits, according to the paper. There’s an upper limit of 3,000 euros on digital euro balances, but there’s no guarantee that this would be sufficient.
There’s the potential to improve cross-border payments, according to the paper.
“The PDE is unlikely to increase financial inclusion in the eurozone but could help solve the longstanding problem of the high costs and delays of cross-border workers’ remittances,” the paper said. “For this objective, a limited and targeted version of a PDE (i.e., not open to all citizens and enterprises) would be adequate, coupled with interoperability of central banks on a bilateral basis.”
There’s other friction to consider in the case of issuing CBDCs, as individuals and businesses might gravitate toward the digital euro, negatively impacting banks’ liquidity. And with less liquidity in the mix, traditional financial institutions (FIs) would be less inclined to lend to businesses and households.
The International Monetary Fund (IMF) has been weighing in on CBDCs and considering the differences between wholesale CBDCs, which are issued by central banks and let FIs carry reserve deposits, and retail CBDCs, which are issued by central banks for consumers and businesses.
As quoted by Cointelegraph this week, IMF Managing Director Kristalina Georgieva said at the Milken Institute’s 2023 Global Conference: “We think that wholesale CBDCs can be put in place with fairly little space for undesirable surprises, whereas retail CBDCs completely transform the financial system in a way that we don’t quite know what consequences it could bring.”
While the debate plays out over what CBDCs, (and stablecoins) are designed to do — and whether they might clash with the traditional banking system — the path may be paved to apply technology to regulated institutions and fiat money. In doing so, the transparency and speed of payments, particularly cross-border transactions used by banks and by businesses, could be improved.
There is also no stutter step involved as has been seen with stablecoins, where there have been examples of de-pegging from the assets backing those digital offerings (and which attempt to establish a one-to-one parity with U.S. dollars, for example).
The tokenized deposit may gain wide embrace globally by businesses, which have in recent weeks been the ones with the $250,000+ accounts that have been most vulnerable to bank runs and the lingering debate over deposit insurance.
Bank depositors, with claims on the banks themselves, would convert their deposits into and out of digital assets that act exactly as fiat. The tech-enabled movement of money would make the banking relationship and payments more efficient, including trading and settlement.
PYMNTS research found that 56% of cross-border businesses use blockchain technology in their operations, and a roughly equivalent percentage has been using cryptocurrency. Given the volatility and regulatory uncertainty surrounding the space, opting to use deposits within the traditional banking system, underpinned by blockchain, may win converts.
For all PYMNTS crypto and EMEA coverage, subscribe to the daily Crypto and EMEA Newsletters.
We’re always on the lookout for opportunities to partner with innovators and disruptors.
Learn More