DUBAI, UAE — Banks may face declining profits as the adoption of central bank digital currencies (CBDCs) for cross-border transactions increases, a Moody’s Investors Service report points out.
CBDC technology, which offers faster, more affordable, and safer services, has the potential to reshape the global economy. Nevertheless, banks might encounter difficulties in this evolving economic environment as their role in cross-border transactions becomes less significant, it adds.
Moody’s notes that CBDCs are likely to reduce costs for individuals sending remittances and decrease settlement and counterparty risks for banks involved in cross-border transactions. The growing utilization of CBDCs as a more stable alternative to cryptocurrencies is also attributed to fluctuations in the crypto market.
While many domestic CBDC proposals anticipate a critical intermediary role for banks, cross-border CBDC transactions would depend on entirely new infrastructure that drastically diminishes banks’ participation.
Moody’s cautions that despite banks benefiting from the elimination of settlement risks and the creation of more efficient digital systems, they could potentially lose a portion of their revenues from cross-border payments.
This is particularly true if governments require them to pass efficiency gains onto customers, it highlights.
Global correspondent banks are likely to be the most impacted, as their roles in the new system might be significantly reduced. For CBDCs to fully realize their benefits, they must be compatible with other payment systems and facilitate instantaneous cross-border transactions.
The UAE Central Bank recently announced the implementation of its Digital Dirham digital currency strategy, a step towards preparing the nation’s infrastructure for the future of finance. The CBUAE has engaged with G42 Cloud and R3 as the infrastructure and technology providers respectively for its CBDC implementation.
Nearly all central banks globally are investigating the feasibility of national digital currencies, with countries like China, the Bahamas, Nigeria, and Jamaica already introducing or testing their own CBDCs.
Moody’s emphasizes the significance of interoperability in CBDC adoption, recommending that central banks integrate this feature from the start to prevent the creation of a CBDC that cannot be easily exchanged for other digital assets or cash.
If this is not achieved, it could lead to a globally fragmented CBDC system, with countries forming separate digital islands and missing the opportunity to develop a more interoperable global network, the report suggests.