Emerging central bank digital currency (CBDC) cross-border transaction technology could transform the global economy by offering faster, cheaper and more secure services to many of its participants. But banks may not fare so well in this new economy, Moody’s Investor Service says in a report dated March 21.
Many proposals for the domestic use of CBDCs envision a crucial intermediation role for banks in their operations, but cross-border transactions with CBDCs would rely on greenfield infrastructure that would further reduce the role of banks, Moody’s noted. Banks would also benefit from the new technology. Settlement risk could be reduced or eliminated:
“Banks could make, clear and settle cross-border payments at low cost and in seconds, without the need to subscribe to multiple payment systems or rely on correspondent banks in other countries.”
Same innovations too “they would reduce the profits of banks for payments, correspondent services and probably also for foreign exchange transactions.” The role of correspondent banks could be eliminated entirely. And not only that:
“In a CBDC-driven economy, banks may well have to redesign their operations. They may be forced to join new networks and create the necessary infrastructure to support interoperability of CBDCs at scale, which will place a burden on banks.” short-term resources.
The interoperability of retail and wholesale CBDCs is being worked out in pilot projects, often with the involvement of the Bank for International Settlements. “Central banks may have to compromise on some aspects of decision-making to make their CBDCs interoperable,” Moody’s states. Otherwise, “digital islands” could be created between small groups of countries that can transact with each other, but not with other countries.
Issues such as anti-money laundering, sanctions, and privacy would require a legal and regulatory framework, and support for CBDCs is not universal. “Incumbents who benefit from the existing architecture are unlikely to help facilitate its adoption,” notes the report.
An American CBDC is facing denial from some lawmakers on privacy grounds. The direct exchange of currencies could also reduce the role of the US dollar in the world economy, which does not increase its attractiveness in Congress.
5. Moody’s Downgrades the Entire Banking Sector
Moody’s Investors Service cut its outlook for the entire US banking sector and placed six banks on review for potential credit downgrades in the wake of the collapse of SVB and Signature Bank. https://t.co/IcY2jjQF7W pic.twitter.com/EvkwSaC58Z
— Investopedia (@Investopedia) March 15, 2023
Moody’s downgraded the US banking sector’s rating to “negative” on March 14. already has examined previously the effects potentially disruptive of CBDCs in commercial banking. This report was released almost simultaneously with the US Treasury report detailing the possible effects that a CBDC could have on the national banking system.
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