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A number of governments are already in various stages in the development of their central bank digital currencies. However, one of the Big Three credit rating agencies warned that CBDCs could threaten financial systems if the risks associated with them are not properly managed.
Fitch Ratings made its warning in a report titled “Central Bank Digital Currencies: Opportunities, Risk and Disruption” released on Monday. The report discussed the various benefits and risks associated with the issuance of government-backed digital currencies.
“Widespread adoption of CBDCs may be disruptive for financial systems if associated risks are not managed,” Fitch Ratings warned in its report. At the moment, no government has fully launched its CBDC but China appears to be leading as the country has already tested the digital yuan in key cities.
The rating agency mentioned a few specifics on how a central bank digital currency might undermine financial systems. “These 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,” Fitch Ratings added.
However, Fitch Ratings also recognized the benefits of retail CBDCs such as the potential to broaden the reach of government-backed cashless payments. For instance, emerging markets could unleash CBDC’s potential to include underbanked communities into the financial system while lowering the cost and improving the speed of cashless payments.
Some are also becoming increasingly wary of the clout wielded by privately owned digital payments networks and see CBDC as a way to counter it. “The rise of digital payment systems, which have strong network effects, can create oligopolies among payment-system providers, often from the private sector,” Fitch said. “Widespread use of CBDCs could erode these providers’ control over payments-related data and improve central banks’ capacity to track financial transaction data, aiding the prevention of financial crime.”
Fitch also offered some factors that could lessen the appeal of CBDCs and hinder their adoption. These include putting a cap on electronic wallets and if they offer less privacy than cash. “The programmability of CBDCs offers further avenues for flexibility… however, attaching such features to CBDCs may make them less attractive to users, relative to cash,” the rating agency added.
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