Fitch Ratings: Central Bank Digital Currencies Create Trade-Offs with Traditional Financial Systems

The widespread adoption of general-purpose central bank digital currencies (CBDCs) will create a number of trade-offs between benefits and risks for authorities.

According to a note published by Fitch Ratings, the broadening acceptance of CBDCs may prove to be disruptive for financial systems in the event that subsequent risks are not managed properly. “These [risks] include the potential for funds to move quickly into CBDC accounts from bank deposits, causing financial disintermediation, and for heightened cybersecurity threats as more touchpoints are created between the central bank and the economy,” the analysts explained in their note.

As Fitch points out, there are a number of major benefits to retail CBDCs. They potential to strengthen authority-backed cashless payments, as well as create an opportunity to incorporate traditionally underbanked emerging markets into the financial system. However, CBDCs also have a downside. They could offer less privacy compared to cash, and governments could significantly control the amounts held in electronic wallets— thus deterring the public from using them.

Fitch’s latest warning comes as several key central banks are moving ahead with ambitions to create their own digital currencies. The race to create CBDCs is part of a wider movement to revamp the current financial system, speed up the time between domestic and international payments, as well as curtail the threat from unregulated cryptocurrencies.

So far, China is in the midst of an extensive pilot project testing the digital yuan in a number of major cities across the country. The communist economy plans to make its sovereign digital currency debut in time for the Beijing 2022 Winter Olympics. In the meantime, the Central Bank of Russia is planning to unveil its first digital ruble prototype sometime this year, while the Bank of Japan revealed last month that it has started researching the usefulness of issuing its own digital currency.

Information for this briefing was found via Fitch Ratings. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.