The proposed launch of Central Bank Digital Currencies (CBDCs) in many countries has been identified by many observers as a potential threat to banks and other financial institutions.
Despite this threat, European Central Bank Governing Council member Jens Weidmann advises that these banking firms should not be treated as “endangered species” that can’t handle the competition.
Many central banks worldwide are designing their CBDC products such that they would be storable in self-managed digital wallets, a design that can push many consumers to withdraw their funds stored in banks. If this happens, the banks will lose their source of deposits, which is essential in funding other businesses like lending. Drawing on this potential threat to the banks, Weidmann said
“CBDC should be designed in a way that allows its users to reap its potential benefits as fully as possible while keeping its risks and potential side effects at bay.”
One of the ways to do this is by placing a withdrawal or usage limit so consumers do not withdraw their funds indiscriminately. This, he admonished, should be done by not being too protective of the institutions.
Weidmann believes the advent of CBDCs can stir competition amongst the financial institutions, a scenario that can spell positivity in the long run. “On the upside, CBDC could spur on competition among banks and promote new services,” he said. “Some banks might also become more cautious and reduce the potential for banking stress.”
The European Central Bank (ECB) is amongst the major monetary watchdogs with a vested interest in the Digital Euro pursuit. The ECB President, Christine Lagarde, has often reiterated the bank’s plans to launch the CBDC to serve as a complementary digital payment alternative to relieve the existing fiat Euro alternative.
Other economies, including Japan, China, and Sweden, are also exploring the Digital Currency initiative across the board.
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