Beth Hammack, a member of the Goldman Sachs Management Committee, raised the issue of different rules being applied to incumbent banks versus startups in the digital currency sector and multiple times called for a level playing field for banks. She was talking during a panel at the Institute of International Finance.
“Right now, we’re almost in the worst possible scenario. We have a lot of innovation, a lot of ideas, a lot of excitement about the possibilities. But we don’t have a ruleset,” she said, mentioning a need for guardrails. “We need some understanding about how we can really operate in this system.”
Jon Cunliffe, Deputy Governor of the Bank of England, was on the same panel. The previous day he highlighted the rising risks of cryptocurrencies to financial stability. And he raised a similar point to Hammack’s, that bank industry associations say it’s undesirable to restrict banks from getting involved in cryptocurrencies.
The role of banks in a retail CBDC
One of the questions is how big a role banks will play in a future retail CBDC. Some amount of deposits will inevitably move away from banks. It will be a matter of degree.
“One of the things we need to think through carefully is when that activity leaves the banking sector, it may move into areas that become more difficult for central banks and regulators to track, identify, manage and oversee,” said Hammack.
She then highlighted that banks have been subject to improved capital standards and liquidity regulations since the financial crisis.
“It has created a pretty significant regulatory moat around doing certain types of activities,” she said. As an aside, the current Basel III proposals will treat any cryptocurrency on a bank’s balance sheet as the highest risk with a 1250% weighting.
The great unbundling
MIT’s Neha Narula, who is working on CBDC research with the Boston Federal Reserve, discussed how a CBDC could fragment payment functionality.
Hammack responded that decoupling roles and responsibilities is an interesting concept without mentioning this role split is already happening with stablecoins. For example, one group might deal with identity and anti-money laundering, another with processing and yet another holding deposits.
“I can see how that could work very well,” she said. “But I do think what’s going to be important is to make sure that every link in that chain, every provider who has a role in the process, is doing it with a level of resiliency, security, safety and competence. So that the overall whole remains as resilient and productive as possible.”