Retail pass-through
The issues of the wholesale banking system are passed onto clients of retail banking institutions. Bank transfers are expensive and slow.
High barriers of entry
Opening a bank account requires an ID, one of the main reasons for 1.7 billion unbanked adults in the world, according to the World Bank. This phenomenon is not limited to emerging economies. Based on FDIC statistics, even in the US, 6.5% of households are unbanked, and 18.7% underbanked.
- Non-inclusive
Loss of monetary control
An essential instrument in central banks’ arsenal is interest rates to adjust monetary conditions. However, the theory that interest on reserves (IOR) provides a price floor and stays tightly coupled with market rates has been contradicted in practice. Market rates have been lower than IOR, which questions the effectiveness of central banks’ levers.
- Frail system
Decline of cash
Private companies dominate digital payments because no digital version of central bank currency exists yet. Due to economies of scale and network effects, a small number of firms usually build quasi-monopolies, introducing substantial systemic risk into the financial system and the macroeconomy in general. Even a small operational problem within a payment network could have severe implications for everyone.
- Anachronistic tech
- Monopolies-led risks
Unauthorized data collection
Concerns about consumer protection represent another driver of CBDC to bring the anonymity feature of cash to digital payments.
- Privacy issues
A modern monetary system
Payment-vs-payment settlement for transfers in different currencies and payment-vs-delivery models minimize credit default risk.
To learn more, check out the in-depth use case report about clearing and settlement.
- Maximum efficiency
- Low costs
Direct access to users
Central banks gain back monetary control by getting direct access to retail users, without banks acting as intermediaries.
With CBDC, central banks can directly target retail users with their policies, increasing the effectiveness of their toolkit. For example, in the case of CBDC acting as an interest-bearing asset, it would represent an alternative to commercial bank deposits for households, reducing banks’ opportunity to independently set interest rates on retail deposits.
- Less intermediaries
Digital money for a digital life
Central banks could directly distribute money to retail users and employ a finely targeted monetary policy. For example, in the wake of the recent stimulus program, stimulus checks could have been distributed instantaneously and according to programmed conditions.
- New possibilities
Safer for everyone
Digital central bank money increases financial stability by offering the public an option for savings with a lower risk of default than storing savings with commercial banks.
- Financial stability
Ready for the future
The digitization further supports additional innovation in payments.
A CBDC could represent a new system that is easier to scale, enhancing speed and efficiency, decreasing the time required for merchants to receive payments down from the current average of three days to minutes.
It would be future-proof and ready for micropayments and IoT payments.
- Fast and scalable
- Micropayments
- IoT payments
CBDC for emerging economies
By making their currencies truly digital through the use of CBDCs, emerging economies can compete with other alternatives, therefore strengthening their domestic currencies. As a result, countries keep their monetary control, allowing long-term financial development and growth and making them less susceptible to exchange rate shocks and liquidity problems.
- Global growth