JP Morgan strategist Josh Younger has penned a piece warning that central bank digital currencies (CBDC) need to be designed to avoid disintermediating commercial banks, Bloomberg reports. The topic is one of the key challenges in a retail CBDC design and is widely recognized as a risk.
YoYounger put a figure on the risk saying it could lead to the loss of 20%-30% of the funding base of commercial banks. And that shift could be rapid in a crisis, another issue that central banks acknowledge.
Much depends on whether the CBDC holdings will be limited. For example, if a key purpose of the CBDC is financial inclusion and the target is mainly low-income households who typically have less than $1,000 in their accounts, the impact would not be material.
“Hard caps of $2,500 would likely meet the needs of the vast majority of lower income households while not having any discernable effect on the funding mix of large commercial banks,” wrote Younger.
Younger was focused on a U.S. digital dollar. Over in Europe, the European Central Bank floated the idea of a €3,000 cap to dissuade citizens from using a digital euro as a store of value. Earlier this year Morgan Stanley estimated this could attract €873 billion ($1 trillion), or 8% of European commercial bank deposits.
It’s worth noting that a cap is just one design tool to encourage the use of digital currency only for payments and not for storage. People keep limited amounts of physical cash because they’re worried about losing it and it’s risky. A similar digital design could also prove effective.
Others have suggested expiration dates and charges for renewing the digital currency, which could act in a similar way to negative interest rates.