[Global Focus] US, China, and EU Compete in Digital Currency... Shaking the Foundations of the Financial Industry

Concerns Over Triggering a 'Bank Run'... Losses Inevitable if Deposits Are Converted
Private Banks Struggle to Compete for Customers... Impact on Risk and Credit Management

Efficiency, Speed, and Security Are Strengths
Paperwork Omitted... Deposit Protection Available
Removal of Entry Barriers for Low-Income Groups
Disaster Relief Funds Deposited Directly by Government

Central Bank Is Monitoring
Unlimited Detailed Tracking of Transactions by Individuals and Businesses Possible

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Suhwan] "The U.S. political sphere is likening the development of the digital dollar to the space race with the Soviet Union. The only difference this time is that the target is China."

On the 14th (local time), when Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), announced at a House hearing that a report on the issuance of the digital dollar would be released in September, Bloomberg News described it as "the financial version of the space race."

Earlier, China had already begun a pilot introduction of the digital yuan targeting 10 million of its citizens starting earlier this month.

On the 14th, the European Central Bank (ECB) also officially decided to begin development of the digital euro.

As countries intensify competition to introduce central bank digital currencies (CBDCs), there are expectations that revolutionary changes will come from the perspective of consumers and businesses as recipients.

"Traditional Financial Industry Could Be Shaken to Its Roots"

The financial industry is expected to experience the most significant changes with the introduction of digital currency.

Once digital currency issued and managed by central banks is introduced, consumers will be able to directly access their accounts opened at central banks like the Fed and deposit savings there. This has led to forecasts that U.S. financial companies, which manage deposits worth $17 trillion and earn huge revenues from various fees and derivative operations, will suffer considerable damage.

Ultimately, issuing digital currency means that central banks will compete directly on the same playing field as private financial companies.

In particular, if central banks, which have strong public roles, intervene by providing consumer account opening services directly, they will abolish various fee policies, and private companies will inevitably lose out in the competition to attract consumers. The Bank Policy Institute (BPI), a leading U.S. banking think tank, predicted that "the introduction of digital currency could shake the foundations of the private financial industry."

There is also a risk of a so-called bank run, where consumers convert cash deposits held at existing banks, which are considered relatively safer during economic crises, into central bank digital currency.

Eswar Prasad, a professor at Cornell University, warned, "Such a situation during an economic crisis would worsen the situation." BPI analyzed, "(If consumers move deposits to central banks or convert them into digital currency) existing banks will inevitably have to reduce assets such as loans," adding, "This could cause deflation."

Banks might pass on the losses from reduced fee income due to decreased assets to consumers by raising loan interest rates.

Poland's private economic research institute Obserwator predicted, "Existing banks will have to offer incentives such as higher deposit interest rates to individuals and companies," and "At the same time, they may also raise loan interest rates to compensate for losses."

Furthermore, as the financial market's center shifts from the private sector to central banks, the possibility of 'government risk' arising in the market increases.

The Committee on Payments and Market Infrastructures (CPMI) under the Bank for International Settlements (BIS) warned, "If central banks are less efficient than private companies, it will have adverse effects on the overall economy." This means that while the private sector has managed market risks and creditworthiness through collective intelligence, inefficiencies in risk management may arise with central bank intervention.

Disaster Relief Funds Could Be Deposited Directly by the Government

[Image source=Reuters Yonhap News]

From the perspective of individual consumers, the most significant expected change is that digital currency could largely remove barriers to entry into mainstream financial sectors.

For example, Bank of America (BoA) requires consumers to maintain a daily average minimum deposit of $1,500 and charges fees if this is not met.

However, with the introduction of digital currency, consumers will use financial services through central banks, eliminating such fee burdens.

Earlier, Fed Governor Lael Brainard stated at a lecture in May, "As of 2017, 18.7% of the entire U.S. population lacked access to mainstream financial services, and 5.4% did not even have a bank account." According to a report by the Federal Deposit Insurance Corporation (FDIC), reasons for not having bank accounts included failure to meet minimum deposit requirements and excessive bank fees.

The introduction of digital currency is evidence that more consumers will gain access to financial services.

FDIC stated, "Digital currency will bring revolutionary changes in developing countries where many populations are excluded from mainstream financial services," precisely for this reason.

Additionally, the convenience of accessing financial services anytime and anywhere via online platforms, social networking services (SNS), and smartphones regardless of bank business hours will also be effective for government disbursement of various support funds.

President Joe Biden of the United States [Photo by AP]

In the future, the government will be able to directly provide support funds to individuals via digital currency, omitting complicated paperwork and enabling more efficient and rapid support. Kristalina Georgieva, Director of the International Monetary Fund (IMF), predicted, "The introduction of digital currency will provide a vital lifeline to low-income groups and developing countries."

For businesses, the expected change is that financial transactions will be conducted through central banks via digital currency, eliminating credit card and payment fee burdens. The Bank of England (BOE) stated in a 2016 report, "Our research shows that the productivity gains from introducing digital currency are equivalent to eliminating tax systems that distort markets."

Moreover, the payment efficiency and speed of digital currency will be advantageous for multinational corporations' cross-border financial transactions. The IMF stated in a 2017 report, "The introduction of digital currency will enable faster and safer cross-border financial transactions."

There are also security advantages. Financial analysis firm Investopedia stated, "Hacking a digital wallet is much harder than stealing cash."

Cash, once stolen, is untraceable, but digital currency has no risk of theft, and central banks directly control the network, ensuring high security.

In particular, depositing digital currency through the central bank network instead of cash in private financial companies at risk of bankruptcy offers the advantage of deposit protection.

Central Banks Could Become ‘Big Brother’

People's Bank of China

However, from the consumer's perspective, the benefits are not all positive.

The biggest issue is that central banks will be able to monitor the financial transactions and personal information of individuals and companies. Forbes warned, "Central banks will be able to track individuals' and companies' digital wallets without limits," adding, "Central banks could even monitor where and when consumers make purchases."

A representative example that raises such concerns is China.

The U.S. think tank Center For a New American Security (CNAS) stated, "The People's Bank of China is promoting the introduction of the digital yuan to access the financial data of billions of Chinese consumers," and "The Chinese government aims to realize political agendas through the digital yuan. Government officials have openly declared plans to use the digital yuan as a tool to implement Communist Party ideology."

This content was produced with the assistance of AI translation services.