Bank Profits at Risk from Potential CBDC Transformation of Global Economy

• Moody’s Investor Service has released a report that looks at the potential implications of central bank digital currencies (CBDCs) on the global economy and international banking.
• The new technology would offer faster, cheaper, and safer services for many players in the global economy, but banks may not fare as well due to reduced profits from payments, correspondent services, and foreign-exchange transactions.
• Banks may need to redesign their operations and join new networks in order to support CBDC interoperability.

Implications of Central Bank Digital Currencies

Moody’s Investor Service has released a report dated March 21 that looks at the potential implications of central bank digital currencies (CBDCs) on the global economy and international banking. Cross-border CBDC transactions would depend on entirely new infrastructure that reduces the role of banks more severely than domestic use of CBDCs. Banks will see some benefits from this technology, such as reduced settlement risk, but they may also experience reduced profits from payments, correspondent services, and foreign-exchange transactions.

Banks Need to Redesign Operations

In order to support CBDC interoperability at scale, banks may be obliged to join new networks and create the necessary infrastructure which could impose a burden on resources in the short term. Issues such as Anti-Money Laundering (AML), sanctions, privacy must also be addressed through legal and regulatory frameworks before full adoption is possible. Financial incumbents who benefit from existing architecture are unlikely to facilitate adoption either.

Experimental Projects

Interoperability for both retail and wholesale CBDC is being worked out in experimental projects often with participation from the Bank for International Settlements (BIS). Central banks must compromise on some decision making in order for their CBDCs to be interoperable otherwise “digital islands” could be created among small groups of countries that can transact with each other but no other countries.

Benefits & Drawbacks

The potential benefits of cross border CBDC transactions include faster speeds & lower costs without needing sign up with multiple payment systems or relying on correspondent banks in other countries; however these same innovations could reduce bank profits significantly too. Furthermore there are issues associated with AML/KYC compliance regulations that need to be addressed before full adoption is possible due to risks posed by money laundering activities using digital currencies such as Bitcoin etc..

Conclusion

Ultimately it seems like a transformation towards an economy based upon cross border CBDC technology is inevitable; however much work needs to done before we can achieve this goal including addressing security concerns related KYC/AML regulations & ensuring financial institutions do not suffer too much disruption due increased competition from new entrants into space such as tech giants like Facebook & Google who have already launched their own stablecoins respectively .