More and more countries, including the leading global economies, such as the US, India, and European states, are gearing up to develop their centrally-issued digital currencies. This could result in a major challenge for America’s commercial banks—and to overcome it, they may need to expand into an area that once rallied around their undoing.
There is no telling yet whether the digital dollar will run on the blockchain or a different kind of a ledger, or whether the chain will be public or private, permissioned. Central banks seem to prefer the latter, for better or worse, as permissioned chains do not bring in the same level of decentralization that protect the integrity of an open public ledger. Either way, this is still unclear.
There is a product in the crypto market that should be watching CBDCs with unease. These are stablecoins, coins with a static exchange rate against a different asset, usually USD. While offering no prospect of wild gains, as the “stable” in the name implies, such coins have their own role in the ecosystem. They grant crypto traders a way to lock in their gains on more volatile currencies or defend against a bear market.
If offering a digital dollar, the Fed, as the entity running the proverbial money printer, would hardly find itself cornered up in a hypothetical CBDC bank run—if that can even be a thing at all, assuming a digital dollar is equal to a physical one in all but its exact implementation. This makes for a natural edge against stablecoins, albeit with its own caveat: While stablecoins are very much part of the open blockchain ecosystem, CBDCs will most likely be secluded to their permissioned chains, if at all implemented on-chain.
Today, crypto and fiat ecosystems largely stand on their own, connected through bridges known in the industry as on- and off-ramps. In our CBDC-driven tomorrow, this principle may still hold, but these bridges may very well be different, and banks are ideally positioned to take on this function, carving out a new niche for themselves in the brave new world emerging from the blockchain.
Institutions are already dipping their toes into crypto, including banks themselves, but also investment funds, asset managers, and corporate treasurers. Blockchain has more to offer to banks than a simple new role in the market. It also grants them access to new revenue streams, from fees on custodial services and crypto-CBDC swaps to yields from native staking protocols and DeFi services.
Furthermore, much like the traditional deposit accounts, they would be able to offer staking and DeFi options for the stable CBDCs, adding a whole layer of utility to the central bank’s token and granting its holders lucrative yield options. All of this is sure to offset whatever losses they may or may not incur from a CBDC rollout.