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Central Bank Digital Currencies (CBDCs) & It's impact on Financial Institutions

With all round rising interest in cashless society evident by growth of digital banking and mobile banking system across the world, demand for digital currencies has become impossible for central bank to ignore and therefore, Government and central bank worldwide are exploring the possibility of using government backed digital currencies. When they are implemented, these currencies would have the full faith and backing of the government that issued them, just like fiat money. CBDCs have the potential to change the way individual and businesses store money and facilitate transaction processing. What is CBDCs? CBDCs are digital tokens, similar to crypto currency, issue by central bank. In other words, a central bank digital currency is the digital form of country's fiat currency. Unlike Bitcoin and other decentralized cryptocurrencies, CBDCS are digital form of central bank issued money in which the central bank carries all the liabilities. There are 2 form of CBDCs

1) Retail CBDCs are the one that can be directly held by individuals and entities as a form of digital cash.

2) Wholesale CBDCS-are the one that are intended to be used by financial institutions that have central bank accounts to conduct interbank transactions and Financial settlements. Potential impact of a cashless society on Financial Institutions CBDCs have the potential to disrupt the traditional business model of financial institutions and create new business opportunities. From the financial Institutions point of view core business model of any financial institution is based on deposits from customers and generating revenue by redistributing such funds to customer via different lending products (such as loans and mortgages).


Introduction of retail CBDC with a digital wallet may emerge as a new challenge for the banking institutions in terms of the assets liability capital management (ALCM). In era of CBCDs users may elect to store CBDCs in digital wallet offered by Non-Banking institutions, which would Impact the deposits side of the Banking Institution's Balance Sheet. The potential lower deposit balance may pose an assets liability management risk and will constrained the bank's ability to create credit, which ultimately would impact the credit flow in the economy. In this case, banks may face pressure to consider offering high interest rate on deposits in order to attract customers to deposit in bank deposit accounts, leading to an increase in the cost of credit. Therefore, creating asset liability risk to the banking Institution. The ability to conduct payment instantly using digital CBDCs may depress Financial Institution's ability to collect fees from cheque services, wire transfers and other payment services, therefore again posing financial pressure on the Financial Institutions. What can financial Institutions be doing? Considering the developments around CBDCs, Financial Institutions should recognize the possibility of the future where (1) significant amount of global economic activities is conducted with CBDCs. Business model have changed drastically. (3) Cash usage has changed drastically. Financial Institutions now has to look into for identifying and offering new products and services to better serve their customers and allow banks to emerge as industry leaders in the digital assets space.

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