Banks led to bankruptcy by the digital dollar

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LES KEYS DE LA CRYPTO is a section that patiently decodes the world of cryptocurrency and its stock market, industrial and media turmoil. François Remy’s mission is to identify promising entrepreneurs, decode technical progress and anticipate the industrial and societal impacts of this digital currency.

(Illustration: Camille Charbonneau)

Faith of bankers, the “FedCoin” constitutes a dangerous project. Like any good monetary institution in the world, the US Federal Reserve is exploring possibilities to issue its central bank digital currency (MNBC) soon. A disaster scenario according to players in the banking industry.

“Contrary to popular belief, there is no need to digitize the US dollar because the dollar is largely digital today.” It is with this witticism that Rob Morgan, senior vice president of innovation and strategy at the American Bankers Association (ABA), begins his long letter to the Fed’s executive board. The thick 24-page document lists and argues the many risks that a central bank-issued digital currency would pose to the banking system.

Besides the fact that this would profoundly change the relationship between consumers and the monetary institution, transforming private money into public money, bankers preach above all for their chapel. Because they have a lot to lose in this possible exchange transaction. Federal Reserve policymakers are not fooled and can easily guess the effects.

“An MNBC could pose a variety of risks and raise important policy questions, including how it might affect the market structure of the financial sector, the cost and availability of credit, the security and stability of the financial system, and the effectiveness of monetary policy” pointed out the Fed’s new report on financial stability a few days ago.

In other words, having an official digital dollar with the central bank would quite mechanically replace the deposits of commercial banks. Customers, by abandoning their traditional bank accounts, would then put pressure on the availability of credit and increase the cost for households, businesses and… governments.

Bank against bank

“Deposits are among the most stable sources of bank funding, for which banks compete fiercely,” concedes the VP of the American Banking Association. “The loss of these deposits would mean that banks’ funding costs for banks would increase.”

The importance attributable to these deposits has steadily increased over time. At the end of last year 2021, banking institutions held US$16.9 trillion in transaction and savings deposits on their balance sheets, representing 71% of the banking industry’s total funding.

Banks of all sizes rely on these deposits to fund their operations. But that’s all, in the worst case, one where all account deposits would be converted into digital currency on the central bank’s wallet, the sector would lose 71% of its funding. It is obvious that this gaping hole should be filled by other sources of income.

“This would not only increase banks’ funding costs, but would completely change their asset/liability management and, consequently, the entire banking business model as well as their ability to manage risk,” insists the ABA.

How could commercial banks compete against a government institution that “prints” money recklessly? Conversely, how will central banks address and manage these uncertainties and the disorderly impacts on the real economy? How do you predict the rate at which deposits are likely to leave balance sheets? In this case, how can sufficient sources of funding be encouraged?

Some crypto-enthusiasts will gladly argue for a sound alternative currency that already exists, without intermediaries and with computer-programmed money supply. But that is another subject.


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