Emerging central bank digital currency cross-border transaction technology could transform the global economy by providing faster, cheaper and more secure services for many of its players. But banks may not fare so well in this new economy, Moody's Investor Service said in a report dated March 21.
Many proposals for domestic use of CBDCs envision a crucial intermediary role for banks in their operations, but cross-border CBDC transactions would rely on entirely new infrastructure that would further reduce the role of banks, Moody's noted. Banks would also see the benefits of the new technology. Settlement risk could be reduced or eliminated:
“Banks could make, clear and settle cross-border payments at low cost and in seconds without the need to register with multiple payment systems or rely on correspondent banks in other countries.”
The same innovations would also "reduce banks' profits from payments, correspondent services and probably from foreign exchange transactions as well." The role of correspondent banks could be eliminated entirely. Not only that:
“In a CBDC-driven economy, banks may need to redesign their operations. They may be forced to join new networks and build the necessary infrastructure to support CBDC interoperability at scale, which will place a strain on resources in the near term.”
The interoperability of retail and wholesale CBDCs is being worked out in pilot projects, often with the involvement of the Bank for International Settlements. “Central banks may need to cede some decision-making to make their CBDCs interoperable,” Moody's said. Otherwise, “digital islands” could be created between small groups of countries that can transact with each other but not with other countries.
Related: India and UAE to explore CBDC bridge to facilitate trade and remittances without USD
Issues such as anti-money laundering, sanctions, and privacy would require a legal and regulatory framework, and support for CBDCs is not universal. “Incumbents who benefit from existing architecture are unlikely to help facilitate adoption,” the report said.
A CBDC from the United States faces opposition from some lawmakers for privacy reasons. The direct exchange of currencies could also reduce the role of the US dollar in the world economy, which does not increase its attractiveness in Congress.
5. Moody's downgrades the entire banking sector
Moody's Investors Service cut its outlook for the entire US banking sector and placed six banks on review for possible credit downgrades following the collapse of SVB and Signature Bank. https://t.co/IcY2jjQF7W pic.twitter.com/EvkwSaC58Z
— Investopedia (@Investopedia) March 15, 2023
Moody's degraded the US banking sector to "negative" on March 14. examined the potentially disruptive effects of CBDC in commercial banking before. This report came out almost simultaneously with the US Treasury report detailing the potential effects that a CBDC could have on the national banking system.
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