As countries around the world breathlessly pursue the development of a central bank digital currency, Deutsche Bank is warning they “will have major and profound implications for all economic actors which should not be underestimated.”
Although the German financial institution acknowledges CBDCs could make transactions easier and create greater levels of transparency, it has released a report that warns digital assets are yet to be tested broadly and in real time.
Deutsche Bank is also nervous about CBDCs being issued through distributed ledger technology—stressing that such platforms have “not yet been proven as sufficiently robust for a wide-scale implementation.”
Drilling down into the potential consequences as the likes of Sweden and China abandon cash, the report added:
“CBDC could lead to the controls on individuals’ spending for political as well as criminal reasons… [and] could erode the dollar’s primacy in the global financial market.”
The Deutsche Bank report doesn’t necessarily warn that CBDCs are a bad thing—instead, the authors are trying to raise awareness that they will “present multiple challenges” to consumers, financial institutions, central banks and governments. They wrote:
“If implemented, CBDC could change the world we live in significantly.”
Privacy, scalability and regulation issues could quickly emerge, the authors said—and if consumers end up having their own CBDC accounts, this could mean that the roles of conventional banks need to be redefined, as the lack of conventional deposits would affect their ability to lend.
“The role of banks as a gatherer of private savings could change significantly, at least they would need to offer higher interest rates than the central bank in order to attract savings,” the report said.
Deutsche Bank’s tone wasn’t relentlessly pessimistic. The report noted that CBDCs could open up “radical” measures to central banks, and prevent policy decisions from being diluted. Some of the concepts that could be explored include “helicopter money,” where cash is directly transferred to individuals to stimulate demand.
“Conditionality could also be set. Time-restricted access, consumption allowances for certain products as well as pay-outs linked to the ordinary income are all imaginable,” it said.
The impact for individuals
To ensure that central bank digital currencies get off on the right foot, the report said that payments would need to be secure and simple for everyday consumers, cross-border transactions should be straightforward and inexpensive, and universal access must be guaranteed.
Deutsche Bank also suggested that the popularity of CBDCs could vary from country to country because of the “clear trade-off” between privacy and convenience—with nations such as Germany, where consumers prefer cash and are distrustful of digital payments unlikely to flock to this technology in their masses.”
The report noted that “empirical evidence shows that younger age groups are less concerned (in general) about possible reductions in privacy and are more open towards new technology and the opportunities it may bring. This leads to an intriguing question,” it added:
Will emerging market economies with their younger populations be more willing to adopt such a currency system with these pluses and minuses than developed countries?”
What it means for governments
The Deutsche Bank report also said that CBDCs could make it easier for governments to crack down on money laundering and tax evasion—and make welfare payments far more efficient than they are now.
“The coronavirus crisis has underlined the need for secure, accurate and fast transmission of social benefit payments. With CBDC, claims by companies and individuals could be directly met, with a lower possibility of mispayment or fraud,” the report added.
In conclusion, the German banking giant is calling for a “reality check”—and for a moment’s pause—given how CBDCs could end up being operational in just a few short years. One of the biggest questions centers on how reliable these new systems would be during a time of crisis, or when there is major market disruption.
Given the bank’s warning that CBDCs could unseat global reserve currencies, America’s lack of urgency when it comes to developing a digital dollar is all the more confusing. Federal Reserve chairman Jerome Powell has previously said that a U.S.-issued CBDC would be “pointless,” while Treasury Secretary Steven Mnuchin recently predicted that one wouldn’t be needed until 2025 at the very earliest.
However, the U.S. dragging its heels may be a stroke of genius. China and Europe will likely end up being the first to test a CBDC on the masses, and the benefits of not going first mean that you can learn from the mistakes of others.