Central bank digital currencies (CBDC) for cross-border transfers could negatively impact banking sector profits, as its role in the new infrastructure would be substantially diminished.

Profitability of Banks Could Shrink After CBDC Adoption

According to a report by Moody’s Investor Service, CBDC has the potential to provide faster, cheaper, and safer cross-border services for all parties involved, but a significant portion of banking sector profits could be at risk.

Cross-border transactions with CBDCs will depend on an entirely new infrastructure that will seriously limit the role of banks in the process. Thanks to the technology underlying CBDCs, financial institutions will be able to make cross-border payments at low cost and in seconds without having to use multiple payment systems or rely on correspondent banks in other countries. Such innovations will drastically reduce banks’ profits from payments, correspondent services, and foreign exchange transactions.

The report also found that CBDCs could transform the global payments market and solve several fundamental problems that banks face in the traditional economy. According to Moody’s analysts, the only condition under which public digital currencies can reduce remittance costs, waiting times, and settlement risk is their interoperability. To achieve interoperability between different CBDCs, central banks will have to compromise on some solutions, otherwise “digital islands” will be formed.

The interoperability of CBDCs is already stressed by various international financial organizations. Specifically, the Bank for International Settlements (BIS), the International Monetary Fund (IMF), and the World Bank (WB) are urging central banks to create CBDCs interoperable in advance. At the same time, SWIFT is actively developing tools to ensure the direct interoperability of various CBDC projects and working on a technical solution for cross-border payments using them. In turn, analysts at the International Monetary Fund (IMF) argue that the design of CBDCs should take into account the limitations of the Islamic banking system, otherwise the compatibility of some of the state digital currencies won’t be impossible.

Author: Nataly Antonenko
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