The number of countries developing central bank digital currencies (CBDCs) has dramatically increased as consumer preferences for digital payments shifted more rapidly as a result of the coronavirus pandemic, said Moody’s recently.
The advancement of CBDCs has also been driven by the rise of stablecoins and the acceleration of digitalisation, while financial inclusion, security costs of cash, reducing informality and improving payment efficiency, especially in emerging markets, are other catalysts, Moody’s noted.
Benefits from the adoption of CBDCs would vary across jurisdictions, and CBDCs can be geared toward addressing specific idiosyncrasies, said Moody's Vice Presidents Farooq Khan and Melina Skouridou.
"A CBDC could provide a systemically safe, state-sponsored payment alternative to existing payment rails. In emerging markets, increasing financial inclusion thereby reducing informality, as well as lowering costs of existing inefficient payment systems are additional compelling arguments for developing and launching CBDCs,” the two VPs pointed out.
With consumer preferences towards faster, easier, cheaper digital payments continuously growing, central banks are favouring the least disruptive choices when designing their digital currencies, the credit rating agency said.
The preferred choice for the CBDC model is the two-tier retail CBDC, in which banks and other financial intermediaries maintaining client-facing roles while end users see little change in terms of interacting with their current financial institution.
CBDCs are inherently disruptive to financial institutions, and, although not meant to compete directly with bank deposits, CBDCs would provide an appealing risk-free alternative, attracting retail deposits, the predominant funding source of banks, Moody’s observed, adding that this would create heightened disintermediation risks for banks, higher funding costs and fee income loss.
The degree to which CBDCs are disruptive to existing monetary systems will depend on specific choices central banks make in the design of their CBDCs, and these choices will likely differ across countries, the firm said.
Ultimately, these key features will determine the relative attractiveness and ranking of a CBDC against other alternatives available to individuals as stores of value and mediums of exchange, the firm added.
Central banks will have to balance CBDCs' potential to solve specific problems against its disruptive effects to existing financial market infrastructure, particularly banks, Moody’s noted.
