Bank of America states that “digital currencies seem inevitable“, adding that central bank digital currencies (CBDCs) and stablecoins are “a natural evolution of current monetary and payment systems“. The bank expects that “private sector beneficiaries will appear in all phases of CBDC implementation.“
Bank of America on the future of money and payments
Bank of America’s (BOA) global research team released a report on global crypto-currencies, digital assets and central bank digital currencies (CBDCs) earlier this week. The bank writes:
Digital currencies seem inevitable. We see distributed ledgers and digital currencies, such as CBDCs and stablecoins, as a natural evolution of current monetary and payment systems.
“We believe that CBDCs, leveraging distributed ledger technology, have the potential to revolutionize global financial systems and could be the most significant technological advance in the history of money“, BOA described.
The report explains that there are currently 114 central banks exploring CBDCs, representing 58% of the countries in the world and more than 95% of global GDP. It also notes that central bank digital currencies “do not change the definition of money, but will likely change how and when value is transferred over the next 15 years.”
According to Bank of America, “CBDC issuance by central banks seems inevitable for three reasons.“First, they “can increase the efficiency of cross-border and domestic payments and transfers.“In addition, they “can reduce the risk of central banks losing monetary control” and “increase financial inclusion.“
The private sector is essential to CBDC development
The Bank of America report adds that “the private sector is essential to the development and issuance of CBDCs“, stating:
Central banks and governments cannot build new financial systems based on distributed ledger technology alone and have indicated that they will rely on the private sector to drive innovation in digital assets. We expect private sector beneficiaries to emerge in all phases of CBDC implementation.
For example, the report states that governments can “award contracts to payment and consulting firms in exchange for expertise.“
Bank of America also highlighted some risks. “The issuance and adoption of CBDCs could also increase the frequency of bank failures if not properly designed“, the bank warned, adding that “during times of stress in the banking system, people might withdraw their deposits and exchange them for CBDCs, as there is no credit or liquidity risk if they are distributed with the direct and hybrid approaches, which increases the risks to financial stability.“The report concludes:
However, central banks could mitigate this risk by introducing limits on CBDC holdings, on a temporary or permanent basis.