E It Is An Open Secret That Central Banks Are Moving Towards Digital Currencies

As we witness daily how digitalization is changing the way people pay, central bankers have been exploring the merits of moving away from cash and into digital currencies (the term used is CBDC). The most recent addition to this research is the report of the Bank of International Settlements. The COVID-19 pandemic has accelerated the likelihood of CBDC as more businesses shun the use of cash in daily transactions for both health/safety reasons as well as overall efficiency. Consequently, investors have poured funds into a variety of fintech companies (e.g. Square, PayPal, Visa, MC) who have developed the technical capability to challenge the commercial banks' payment systems. Broadly speaking, the fintech companies aim to speed up settlements, reduce end-user costs, facilitate peer-to-peer money transactions, and to expand their user base to gain maximum operational scale. (The reader should not confuse Bitcoin and other stable coins which operate outside the banking system).

It used to be a fantasy that government would make payments directly to individuals, the so-called ‘helicopter’ money.  No longer is the case. Governments have sought to make direct deposits of cash into individual bank accounts as part of their overall efforts to deal with the dire consequences of the pandemic. The central banks did not have a digital currency policy in place, so bureaucrats had to use the more cumbersome methods of cash deposits through the commercial banking system. The pandemic highlighted the need to get funds rapidly into the hands of households as the lockdowns shuttered businesses.

Critics of CBDC argue that it will foster disintermediation of the banking system--- that is, the banks will be by-passed and experience a drop in deposits. However, research at the Bank of Canada concluded that Canadian commercial banks are well-capitalized and have adequate liquidity to deal with a temporary negative impact on their ability to attract deposits (The potential effect of a central bank digital currency on deposit funding in Canada).

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Arthur Donner 9 months ago Contributor's comment

nice article Norm. I agree that the shift to digital transactions shouldn't hurt the Cdn banks.

Norman Mogil 9 months ago Author's comment

What will hurt the banks is the competition from fintech companies that are going to bypass the banks payment system. The Canadian banks are way behind the curve on that point.

Mario Foti 9 months ago Member's comment

Agreed, Norm. Banking hasn’t evolved much, if at all, since its inception in ancient times. Instead of Temples, there are branches to store coins (or cash today) to ensure payment of loans. Digitizing currency will certainly stir things up, perhaps even lead to the complete collapse of traditional banking as we know it.