3 Digital Currency Challenges Faced By Central Banks, Traditional Banks

The rise in popularity of Bitcoin BTC/USD and other cryptocurrencies has put pressure on the U.S. Federal Reserve and other central banks around the world to create their own central bank digital currencies, or CBDCs.

The transition of money to the digital world may not be an easy one for central banks or traditional retail banks.

Central banks are seeing many of the same challenges as any other businesses faced with a new, disruptive innovation, DataTrek Research co-founder Nicholas Colas said Thursday. 

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Incumbent Challenges: First, incumbents tend to wait too long to take aggressive action.

The Federal Reserve and the ECB are unlikely to have a functional CBDC in place until at least 2025, Colas said. Meanwhile, in the last decade, the global cryptocurrency market has grown to $1.3 trillion in size.

Second, incumbents tend to focus more on defending territory rather than taking risks to innovate the business.

Part of the role of central banks is to ensure economic stability, so it’s understandable why they wouldn’t necessarily be keen to embrace the Silicon Valley mantra of “move fast and break things,” Colas said. 

Third, incumbents often fail to see the big picture. While the Federal Reserve has focused on ensuring the integrity of the U.S. dollar, Colas said the proliferation of tech-enabled payment systems, smartphone apps and digital currencies suggests the basic definition of what defines “money” in the public eye is already changing right under the Fed’s nose.

Changing Definition Of Money: For now, Colas said the best case for why central banks should push aggressively into CBDCs is the potential for entire banking systems to be disrupted, which he said is already occurring.

For example, the $351-billion market cap of digital payments pure-play Paypal Holdings Inc PYPL is already larger than the market caps of U.S. banking giants Bank of America Corp BAC, Wells Fargo & Co WFC and Citigroup Inc C, he said. 

“The only way to put traditional banks on an equal footing with disruptive competitors is to give them a technologically competitive currency,” Colas said.

“U.S. large-cap financials, much as we like them for a cyclical trade just now, need all the long-term help they can get.”

Benzinga’s Take: One of the major drawbacks still keeping many people and institutions from adopting cryptocurrencies as a store of value rather than just a speculative investment is the extreme volatility that remains in the crypto space.

Fiat currencies will be put to a true test if the crypto market ever stabilizes or if global economic circumstances eventually create similar volatility among fiat currencies.

Photo: Federal Reserve Chair Jerome Powell in 2018. Courtesy of the Fed.