ECB researches CBDC and rise of bank disintermediation

Even before their deployment in major economies, one of the concerns that has been voiced about central bank digital currency (CBDC) is that it might be too successful and lead to bank disintermediation, which could intensify further in the case of a banking crisis.

  • CBDC would create an additional channel for deposit outflows that would likely have some impact, in particular in abnormal circumstances
  • International use of CBDC could increase the size and velocity of international capital flows
  • Short-term interest rates are relevant. CBCC, without limits on access or quantities would, however, imply the end of NIRP (negative interest rate policy)

Some also argue that CBDC might crowd out private payment solutions beyond what would be desirable from the perspective of the comparative advantages of private and public sector money. This paper discusses success factors for CBDC and how to avoid the risk of crowding out.

After examining ways to prevent excessive use as a store of value, the study emphasizes the importance of the functional scope of CBDC for the payment functions of money. The paper also recalls the risks that use could be too low if functional scope, convenience or reachability are unattractive for users. Finding an adequate functional scope – neither too broad to crowd out private sector solutions, nor too narrow to be of limited use – is challenging in an industry with network effects, like payments.

The role of the incentives offered to private sector service providers involved in distributing, using and processing CBDC (banks, wallet providers, merchants, payment processors, acquirers, etc.) is discussed, including fees and compensation.

Central banks will want to predict, and to some extent control, the role that CBDCs will eventually play as a store of value and means of payments. Their use must not be so minor that the related investments made are not recovered, but nor should they take on excessive importance and crowd out private innovation, or even undermine stability by damaging the viability of the financial sector. Navigating between these scenarios is therefore a key challenge.

This study draws a clear distinction between the flow of fund effects of introducing CBDCs, which mainly relate to their store of value function and the risk of disintermediation of bank balance sheets, and their role as a means of payment. Overall, controlling the former by means of limits and/or interest rate incentives looks feasible. Steering the latter is more complex, in view of the need to understand and secure the network effect for a new payment option.

The balance sheet effects from the store of value function and the market share in payments gained by CBDC are of course linked. If a CBDC is very attractive as a means of payment it will attract many individuals to open accounts, which could potentially trigger large flows of funds. Similarly, if they are attracted to the store of value function and most individuals rapidly open an account, use as a means of payment will benefit because the incremental step to using it for that purpose will be low.

The same applies to the level of holdings and the level of payment activity: if individuals use CBDC every day as a standard means of payments, the stock needed as a liquidity reserve for these payments will depend on the efficiency of funding mechanisms. There is nevertheless a considerable disconnect between the two functions.

Read the full study

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