CBDCs: The Future of Global Financial Systems?

Central Bank Digital Currencies (CBDCs) are being explored by 114 central banks, representing 58% of countries and 95% of global GDP, according to a research report from Bank of America.

The report highlights the potential benefits of CBDCs, such as real-time settlement, complete transparency, and lower costs.

CBDCs could also improve the current financial system’s outdated infrastructure and inefficiencies, such as the estimated $4 trillion of capital that banks are required to deposit in corresponding banks in order to remove settlement risk. This is an inefficient capital allocation that could otherwise be generating yield elsewhere.

Furthermore, less capitalized banks and payment service providers cannot expand into cross-border payments, the report argues, due in part to the requirement to pre-fund accounts at correspondent banks. This results in cross-border payments costing ten times more than domestic payments.

The researchers also predict that CBDC adoption will positively impact the unbanked population, which is 1.4 billion people worldwide and 6.5% of the U.S. population.

The unbanked cannot access standard financial services or have pathways to building their credit history. This leads to increased separation from their wealth and reliance on payday-loan services that offer only subpar terms and conditions.

If a CBDC wallet was developed to fulfill basic financial services such as being able to hold, send, and receive funds, as well as establish credit histories and provide credit scores, this disparity could be almost entirely eliminated.

A CBDC accessible to those with bank accounts and smartphones would increase the banked population from 93.5% of households to 96.7% in the U.S. Removing the need for a smartphone would increase the banked population to 98%.

The report also includes a few words about the role stablecoins could play in CBDC adoption, noting the significant growth in stablecoin transaction volumes over the past two years, which reached $7.9 trillion in 2022.

The proliferation of stablecoins for cross-border and domestic payments and transfers could inhibit a central bank’s ability to implement monetary policy if growth remains unchecked and unregulated, as well as increase systemic risk.

In conclusion, the analysts from Bank of America believe that CBDCs are an inevitable development in the monetary and payment systems and could revolutionize the way the financial systems work.

They suggest that the benefits of CBDCs, such as real-time settlement, complete transparency and lower costs, could outweigh the risks and that the technology has the potential to improve the current financial system and bring financial services to the unbanked population.