Plans to introduce digital currencies are gaining momentum among the world’s central banks. But what level of disruption will it bring to the financial system? The effects are likely to be far reaching, Chetan Ahya, Chief Economist and Global Head of Economics at Morgan Stanley, reports.
Significant disruption could play out in the financial system
“Commercial banks could face disintermediation, that is, be cut out of transactions if consumers use non-banking entities. Once a digital currency launches, consumers will be able to transfer their bank deposits to their CBDC accounts, subject to central bank limits. And the technological infrastructure of CBDCs could also make it easier for new non-bank entities to enter the payment space. As this transition accelerates, the competitive pressures on commercial banks will likely increase.”
“Another area of impact could be transactions data. We expect a tug of war between the consumers who want to stay anonymous and the innovative fintech companies that will create incentives for consumers to use their platforms, thereby generating valuable user transaction data. Fintech success could spark a proliferation of network effects that allow them to gain market share vs. traditional banks.”
“CBDCs could disrupt the international payment system. Any country with a CBDC that is accepted for international transactions could enjoy significant advantages in financing costs and control over financial transactions, similar to the US dollar's privileged role today. Some central banks, like the ECB and the People's Bank of China, see the move toward digital currency as an opportunity to raise the international status of their respective currencies and share of cross-border payments.”
“While CBDC initiatives aren’t intentionally disruptive, they will likely bring unintended consequences that are. The pace of disruption will hinge on how quickly network effects take hold in the CBDC system; the more widely digital currencies are accepted, the more opportunity for innovation, and the greater the scope for disruption to the financial system.”