Central bank digital currencies (CBDCs) may pose a threat to the global financial systems in case the related risks are not managed, Big Three credit agency Fitch Ratings has said. While the CBDCs may help central banks address the decline in cash payments, various risk factors remain.
Fitch Ratings released a report on May 17 entitled “Central Bank Digital Currencies: Opportunities, Risk, and Disruption.” This report discussed the major trade-offs that exist between risks and benefits that are associated with CBDCs. The report mentioned that the primary benefits of a retail CBDC lie in its potential to enhance government-backed cashless payments to keep up with the widespread digitalization of society.
The main reasons for exploring a CBDC for central banks and some of the other emerging markets are the chances to bank the unbanked and mitigate the cost and speed of payments. Fitch Ratings also said that some proponents see state-backed digital currencies as a strategy to address challenges of the dwindling use of cash with the private sector actively involved in digital payments.
The credit agency wrote:
“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.”
Nonetheless, people may get deterred from using CBDCs in case they offer less privacy than cash, or even severely limit the amounts that are stored on electronic wallets, according to Fitch Ratings.
The company warned that the mass adoption of CBDCs may become disruptive for financial systems in case the involved authorities do not manage the risks that arise. Some of the risks include financial disintermediation that arises from the potential for funds to move rapidly into CBDC accounts from bank deposits.
Fitch Ratings also noted that there are increased cybersecurity risks as “more touchpoints are created between the central bank and the economy.” Today, more governments throughout the world are actively exploring central bank digital currencies, including countries like Kazakhstan and Georgia.
Meanwhile, nations like The Bahamas have been preparing for a country-wide CBDC push this summer. In early May, the United States’ Digital Dollar Foundation officially announced their first pilots.