JPMorgan says digital currencies must balance inclusion and banks

[SINGAPORE]

The creation of central bank digital currencies or CBDCs to address economic inequality with new retail loan and payments channels must be designed so they do not "cannibalise" a country's commercial financial system, JPMorgan Chase & Co has warned.

If set up hastily, retail CBDCs could risk "disintermediating commercial banks" and lead to the exodus of 20 per cent to 30 per cent of their funding base - "potentially rapidly under stress", JPMorgan strategist Josh Younger wrote in a note Thursday.

It is possible to have more "financial inclusion" without significantly affecting the structure of the monetary system, he said. That is because most lower-income households have less than US$1,000 in their checking accounts, and those balances represent a small share of overall bank funding, he said.

"If every last one of those depositors were to hold only retail CBDC, it would not have a material impact on bank funding," Mr Younger said.

"Financial inclusion" is frequently mentioned as a potential benefit of retail CBDCs. Federal Reserve Governor Lael Brainard, in May remarks, cited it as a major impetus for the US central bank to consider its own CBDC. She also said that the Atlanta and Cleveland Feds are conducting separate research projects on digital currency and financial inclusion.

"Hard caps of US$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," Mr Younger said in the report.

"Relatively heavy-handed caps on holdings would be needed to reduce the utility of a retail CBDC as a store of value."

BLOOMBERG