Tag: Digital

China digital currency trials show threat to Alipay, WeChat duopoly, BFSI News, ET BFSI

Banking & Finance

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SHANGHAI: In China‘s commercial hub Shanghai, six big state banks are quietly promoting digital yuan ahead of a May 5 shopping festival, carrying out a political mandate to provide consumers with a payment alternative to Alipay and WeChat Pay.

The banks are persuading merchant and retail clients to download digital wallets so that transactions during the pilot programme can be made directly in digital yuan, bypassing the ubiquitous payment plumbing laid by tech giants Ant Group, an affiliate of Alibaba, and Tencent.

“People will realise that digital yuan payment is so convenient that I don’t have to rely on Alipay or WeChat Pay anymore,” said a bank official involved in the rollout of e-CNY for the Shanghai trial, under the guidance of China’s central bank. The official is not authorised to speak with media and declined to be identified.

China’s development of a sovereign digital currency, which is far ahead of similar initiatives in other major economies, looks increasingly poised to erode the dominance of Ant Group’s Alipay and Tencent’s WeChat Pay in online payments.

That turf encroachment coincides with Beijing’s expanding effort to clamp down on anticompetitive behaviour in the internet sector, part of a wider reining in of the clout of sector heavyweights.

Regulators scuppered Ant’s record $37 billion IPO in November and earlier this month imposed a sweeping restructuring on the fintech conglomerate controlled by Jack Ma. Ma’s Alibaba Group Holdings was recently hit with a record $2.8 billion antitrust penalty.

In public, the People’s Bank of China (PBOC) says e-CNY won’t compete with AliPay or WeChat Pay, and serves only as a “backup” or “redundancy”.

But in private, state banks marketing the digital fiat currency for the central bank bluntly describe Beijing’s intention to undercut the duo’s dominance.

“Big data is wealth. Whoever owns data thrives,” said another banking official tasked with promoting the e-CNY.

“WeChat Pay and Alipay own an ocean of data,” so the e-CNY rollout facilitates China’s anti-trust campaign and helps the government control big data, he added.

The PBOC and Tencent declined to respond to requests for comment.

Ant declined to comment on the relationship between Alipay and e-CNY. Ant-backed MYbank said it is “one of the parties participating in the research and development” of the e-CNY, and “will steadily advance the trial pursuant to the overall arrangement of the People’s Bank of China.”

Digital cash

The e-CNY digitalises a portion of China’s physical notes and coins, or currency in circulation (M0), and was launched last year in small pilot schemes in four cities.

Under a two-tier distribution system, the PBOC issues the digital currency to banks, which pass the money to individuals and companies.

The six banks in the e-CNY pilot schemes include China’s biggest lenders such Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Construction Bank.

“The e-CNY’s ease of use will likely be comparable to Alipay and WeChat Pay, while its security function will likely be higher, and as sophisticated as Bitcoin,” HSBC wrote in a recent report, adding that it expects the digital currency to “proliferate” within China.

Among a slew of likely motivations cited by HSBC behind the push is the central bank’s desire to gain control of payment channels and consumption data from Alipay and WeChat Pay.

Conspicuously absent

Digital wallets, which are still being beta tested, can be bundled with a dozen popular apps including Meituan, JD.com, Didi and Bilibili, but conspicuously can not be linked to WeChat or Alipay. That means none of the participating banks can transfer e-CNY between their digital wallets and the two established payment platforms.

“PBOC doesn’t want to see the money being routed through third-party payment systems,” a banker said, citing the need for “information segregation”.

The e-CNY will digitise “the last mile” of consumption, enabling banks and merchants to capture data and gain insights into spending patterns, said Wilson Chow, Global TMT Leader, PwC China.

That data is now dominated by Alipay and WeChat Pay, which control a combined 94% of China’s online payment market.

Mass adoption of the e-CNY won’t happen overnight.

Chow predicts that e-CNY will account for roughly 10% of China’s electronic payments market in a few years, co-existing with Alipay and WeChat Pay.

To entice users, bankers said the PBOC will likely give “red envelopes” of free digital cash or discounts to Shanghai citizens around the upcoming shopping festival, an event aimed at promoting spending to fuel economic recovery from Covid-19.

PBOC deputy governor Li Bo told a forum last week that domestic adoption will precede cross-border payments with e-CNY, which many analysts believe will bolster the yuan’s global status as China seeks ultimately to break the dominance of the dollar settlement system.

“The priority of the yuan’s digitalisation is currently to promote its domestic use,” Li said.



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Coinshares data, BFSI News, ET BFSI

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NEW YORK: Inflows into cryptocurrency funds and products hit $4.9 billion as of April 16, with the pace of increase slowing a bit in the first two weeks of the month after hitting record levels in the first quarter, data from digital currency manager Coinshares showed on Tuesday.

Inflows in the first two weeks of April hit about $400 million to $4.9 billion, or about 9% higher than an all-time high of $4.5 billion in the first three months of the year.

The pace of inflows had already moderated in the first quarter, after a 240% surge in the fourth.

That said, inflows in the second week of April totaled $233 million, the largest since early March, Coinshares said.

Bitcoin’s rise also slowed in the first two weeks of the month, growing just 5.7%, although it hit a record just under $65,000 during that period. After touching that all-time peak last week, bitcoin has plunged nearly 18% in six days. Bitcoin last traded up 0.8% at $56,161.

“There were … signs of excessive exuberance in the market, and a correction looked imminent,” said Pankaj Balani, chief executive officer of Delta Exchange, a crypto derivatives trading platform.

Inflows last week were more spread out to include other digital assets outside of bitcoin and ethereum.

Bitcoin still saw the largest inflows of $108 million, with ethereum snagging $65 million. But investors poured money into other digital tokens, including bitcoin cash, Polkadot, Binance, and Tezos, Coinshares data showed.

Crypto assets under management (AUM) have also surged to a peak of $64.2 billion, the data showed. In the first quarter, the sector’s AUM was $59 billion. Last year, assets under management for the sector hit $37.6 billion.

Grayscale is still the largest digital currency manager, with $49.5 billion in assets as of the second week of April, while CoinShares, the second biggest and the largest European digital asset manager, oversees about $5.7 billion in assets.

XRP has been the most popular digital asset in recent weeks with weekly inflows of $33 million, nearly doubling its assets under management to $83 million.



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The Future of Credit Cards; Will Virtual cards take over?, BFSI News, ET BFSI

Banking & Finance

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The credit card market is about to be disrupted and the tech companies are leading the charge.

Almost all FinTech startups these days are venturing into lending. They use non-conventional data points to extend lines of credit to people who otherwise wouldn’t have had access to them, thereby greatly expanding the pie to whom credit can be made available and grow fast.

Digital credit cards

Digital credit card or a virtual card is fundamentally different from the plastic credit card offered by banks as it doesn’t use Master-Visa Payment rails, but UPI, which has a larger acceptance for both P2P and P2M payments.

Digital credit cards can originate the customers at huge lower costs and with limits as small as Rs 15,000 – can potentially reach a market of 300-500 million Indian customers in addition to the global market.

Also, digital cards are more secure than plastic credit cards as there is no chance of physical card theft. There is no card data on the device and the mobile phone acts as an authentication device.

Even if the mobile phone is stolen the MPIN acts as a safety check while in the case of higher spending, the mobile camera is switched on for face recognition to authenticate payments.

A hacker with a cloned mobile number cannot use the credit card as the OTP and the device information is locked to the physical device.

Buy now, pay later

In the last couple of years, ‘Buy Now, Pay Later’ (BNPL) products are making a big entrance and gaining widespread popularity as an alternative payment method.

Applying for credit cards is a more lengthy process that can often take days, sometimes weeks, to get approved. Moreover, younger generations also often can’t get approved for a credit card because they don’t have a credit history in order to be eligible. Lastly, the BNPL customer user experience via intuitive apps is much better than most credit card interfaces.

The current credit cards cater only to 30 million salaried employees owing to legacy business models, underwriting methods, and expensive costs of operations. On the other hand, there are 900 million debit card users in India and over 450 million PAN card numbers with some credit history, which can be serviced through digital cards.

The business has too many costs, about Rs 4,000 per card issued needs to be paid to cold-callers, call centres need to be maintained, The companies have to deal with billing disputes and frauds, offer reward programmes to run, which makes small-ticket earnings unviable.

Will credit cards become a thing of the past?

It may be a long time for credit cards to vanish. First of all, credit cards do have the advantage of having a significantly higher card acceptance at merchants globally. A BNPL customer is currently unable to pay at places like Woolworths or Coles for their everyday grocery shopping, or secure a rental car overseas. Visa and Mastercard have created a truly global point of sales and online payment ecosystem and their cards are accepted by more than 40 million merchants globally. BNPL providers have contracts with merchants in place that are a fraction of those. In addition, cross border payments with BNPL are not a reality yet.

Also when BNPL customers pay their instalments, the transactions are done via payment rails of existing schemes (VISA, Mastercard) or via a bank account. This means the schemes are not completely taken out of a BNPL transaction.

Also, the payment and unsecured credit providers in the ecosystem will benefit from forming partnerships to leverage each other’s strengths.



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British digital bank Starling raises £50 million from Goldman Sachs, BFSI News, ET BFSI

Banking & Finance

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British digibank Starling received a £50 million (Rs 523.75 crore) investment from Investment Bank Goldman Sachs, the digital lender announced in a statement. The investment by Goldman Sachs, through its Goldman Sachs Growth Equity Fund, follows Starling raising £272 million (Rs 2849.07 crore) through its Series D funding round in March 2021. Cumulatively, through both raises, Starling said it had raised £322 million (Rs 3372.44 crore).

Founder and CEO of Starling Bank, Anne Boden, on the fund-raise said “Securing the support of another global financial heavyweight demonstrates the strength of demand from investors and represents yet another vote of confidence in Starling.”

“Goldman Sachs will bring valuable insight as we continue with the expansion of lending in the UK, as well as our European expansion and anticipated M&A,” added Boden.

James Hayward, Managing Director at Goldman Sachs added “Starling is one of the leading and most innovative digital banks in the UK, with an ambitious technology-first leadership team and addressing a deep market opportunity.”

The digital bank, founded in 2014, currently has over two million current accounts, which includes 3.5 lakh business account. Starling said its deposit base had also increased from £1 billion (Rs 1047.36 crore) to £6 billion (Rs 62841 crore) in less than a year and was on its path to declare its first full year in profit by the end of the next financial year.



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How Shivalik Bank is transforming from cooperative to small finance bank, BFSI News, ET BFSI

Banking & Finance

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In a conversation with ETBFSI on its transition from an urban co-operative bank to a small finance bank. Shivali Mercantile Co-operative Bank’s Chief Executive Officer and Managing Director, Suveer Kumar Gupta talks about the reason behind the transition, how it’s relying and investing in digital capabilities and partnerships with FinTechs and MSMEs being a key focus customer base.

Journey from UCB to SFB

Shivalik Mercantile Co-operative Bank started in Saharanpur District in Uttar Pradesh is the first urban co-operative bank to transition into a small finance Bank. It acquired Bhoj Nagarik Sahakari Bank Maryadit in Dhar and became a multi-state co-operative bank and further expanded in Indore after acquiring Malwa Commercial Cooperative Bank Limited.

Suveer Kumar Gupta, Managing Director & Chief Executive Officer, Shivalik Bank

The bank has 31 branches and business size around Rs 2050 crore with a deposit base of Rs 1225 crore and advance of Rs 825 crore as of March 31, 2021.

Suveer Kumar Gupta, MD & CEO, Shivalik Mercantile Co-operative Bank Ltd on the transition towards the small finance bank said, “Right from the very start we wanted to be a strong and well managed one of the larger co-operative banks in the country and had aspirations to grow and be professional. For the past few years we’ve been improving our systems, controlling measures, risk management practices and most of all working towards building a strong technology infrastructure. At the same time our focus was on financial inclusion and MSMEs.”

When the Reserve Bank of India in 2015 put forward the small finance bank vision the bank realised they’re in sync with the vision they had set for Shivalik Bank. Gupta said, “The synergies were significant towards a transition to SFB and then RBI came up with voluntary transition guidelines and we jumped to the opportunity and applied for the transition and got an in-principle approval in January 2020 and the final license was in January 2021 and are in the last leg of the journey and hope to go live very soon.”

While the SFB transition will bring in more regulatory oversight and compliance norms, the bank sees numerous benefits with the transition to SFB as existing SFB proven the business model of lending to priority sector with small ticket sizes is successful and as a co-operative bank they have been following for some time.

Gupta said, “We are clear and no two thoughts on how the business will progress. Becoming an SFB will allow us to raise capital for growth and becoming a commercial bank will make it easier to approach investors and infuse a greater trust among the customer base. Further as co-operative banks miss out on government and institutional business, becoming a scheduled commercial bank will help them to reach out for institutional business.”

The bank is eyeing MSMEs as the key are of the focus and 90% of its book is fully secured and about 10% of their portfolio is microfinance. Going forward they tend to retain the philosophy of secured lending and are not shy of unsecured lending as well and will be looking forward to introducing some products in the unsecured side but major focus will be on the secured part.

We are clear and no two thoughts on how the business will progress. Becoming an SFB will allow us to raise capital for growth and becoming a commercial bank will make it easier to approach investors and infuse a greater trust among the customer base. Further as co-operative banks miss out on government and institutional business, becoming a scheduled commercial bank will help them to reach out for institutional business.Suveer Kumar Gupta, MD & CEO, Shivalik Mercantile Co-operative Bank

Ecosystem Partnerships

Gupta says as a bank they realised that the thought process of ownership mindset will not work for them because they are not experts in everything. He said, “ and have partnered with India Gold providing gold loan to customers at doorstep, Airtel Payments Bank for digital sourcing of loans, we’ve tied up Atyati, a microfinance banking correspondent partner and we are in discussion with other few fintechs as well some on customer onboarding side and some on digital sourcing side and invoice financing side where they’re using blockchain.”

They are very much open to digital partnerships and believe having a pan India license the best way to is by not being asset heavy with physical branches but can be done digitally too. “Any customer sitting anywhere can open and operate a Shivalik bank account just using a mobile phone and that is the way we want to go forward.”

We are bankers and will stick to banking. As for technology and other services, let’s seek experts and partner with them. We’ve been looking forward to partner with FinTechsSuveer Kumar Gupta, MD & CEO, Shivalik Mercantile Co-operative Bank


Physical Expansion

On Physical expansion, they want to be a global local bank. He adds, we would do it in the northern region and by physical I would not only consider bank branches but also digital assisted channels like banking correspondents moving around with micro-ATMs. We also have micro-ATMs which are being used by banking correspondents and are connected to the core-banking system in real time.

He explained, customers can withdraw by swiping card or Aadhar and deposit money too among other banking services like bank-in-a-box kind of thing. This would eventually help us in expansion.

Digital Savvy

As the bank is heavily relying on digital partnership and capabilities they’re adequately focusing on cyber-security. He said, “We are focused on the safety aspects of digital exposure. From a customer point of view, we’ve put in all safeguards like two factor authentication, info-sec testing before release, customer education programmes, vulnerability testing, applications have biometric logins. From an organisation perspective, there’s an information-security (info-sec) team in place and internal policy on info-sec has been designed by one of the Big 4 and are one of the first co-operative banks to get cyber-insurance much ahead of the RBI mandate. “

Gupta also said, The bank has hosted its data in a tier-4 data center which is considered to be the best in Asia and its core banking system provided by Infosys is on a hosted model making Shivalik Bank as the first bank to do it.

The bank is ready for the transition and is waiting for the final go-ahead from the regulator, concluded Gupta.



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Inevitable rise of CBDC’s in the digital age, BFSI News, ET BFSI

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Digitalization has thrown almost every part of the economy into disarray, and the payment system is no exception. Cash use has decreased significantly across developed and developing economies as customers have accepted the convenience and ease of digital payments. Privately run solutions have taken substantial market share. These range from well-established (debit and credit cards) to early stage (cryptocurrencies). According to Morgan Stanley, the failure of physical cash to play an effective role in the digital economy raises the risk that monetary authorities will fail to provide the population with a stable, accessible, and reliable means of payment. To protect their monetary sovereignty and mitigate financial stability concerns Central banks are on track to introduce their own digital currencies in the coming years that is Central Bank Digital Currency (CBDC).

Central Bank Digital Currency (CBDC) are a new form of money – digital cash, developed and backed by the central bank with the aim of facilitating digital transactions and transfers. CBDC would offer a new type of widely accessible, digitally issued money. Importantly, CBDC will not be a cryptocurrency, Cryptocurrencies are designed to work without a central issuing or controlling authority, have a fixed or system-determined money supply, and use distributed ledger technology to record and validate individual transactions using cryptography (blockchain). CBDC, on the other hand, requires none of these characteristics. The central banks retain complete control over the currency and its issuance and in most of the cases will track and certify transactions through a centralised ledger.

Central banks will have to make three main design decisions when developing their digital currency systems: Who has access to digital currencies issued by central banks? How are they going to be accessed? What type does a digital currency take in terms of technology?.86% of the world’s central banks are exploring the issuance of central bank digital currencies. The PBoC has already put its eCNY initiative to the test in three major Chinese cities. The ECB will release the results of its recently concluded public consultations and could announce its intention to develop a digital Europe by the summer. In the United States, Fed Chair Powell has described digital currency as a “high priority initiative,” with the Boston Fed preparing to launch one.

Morgan Stanley reported, even without a CBDC, India is an instructive example, Policymakers have taken the lead in developing the public data infrastructure that enables advanced and widely available payment solutions. The public sector has created a strong foundation for private sector innovation to promote payments and increase financial inclusion by providing a national identity verification system (Aadhaar), an instant real-time payment system at the central bank (United Payment Interface), and a comprehensive legal framework on data privacy. As a result, India now has a highly modernised payments infrastructure and has surpassed other emerging markets in terms of financial inclusion.

Morgan Stanley anticipates that central bank digital currencies (CBDCs) will help to strengthen monetary sovereignty and alleviate concerns about financial stability, but they pose a risk of disruption to commercial banks and the financial ecosystem. While central banks’ efforts at introducing CBDC are not intended to disrupt the banking system, it will likely have unintended disruptive effects. Banks will face disruption from three fronts; First, depending on the degree to which consumers can move their bank deposits to CBDC accounts, banks’ deposit bases can shrink. Second, CBDC’s technical framework could make it easier for new entrants to enter the payments market without having to rely on incumbent banks. Third, as more of the transactions move to CBDC, which are likely to include privacy safeguards, banks will have to compete harder for access to consumers’ spending data. The central banks’ design choices would have a significant effect on how much disruption occurs on all three fronts. The speed at which network effects take place in a CBDC system can determine how easily disruption occurs. The greater the acceptance of digital currencies, the more opportunities for innovation and the greater is the risk of financial system disruption.



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PNB plans single app and tailor-made products for customer engagements, BFSI News, ET BFSI

Banking & Finance

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Digital has become the synonym for the banking sector. While many banks have been trying their best to offer seamless and swift service to their customers, a few banks are also thinking of creating customised products for their customers. Sunil Soni, CGM-IT, CIO, explains how PNB is building seamless customer engagement and how they go for digital adoption considering the large presence of the banks.

Customised products

“There was a time when a bank would create a product, then go to the market and look for adoption. Given everything that has been going on in the industry, times have changed now. We need to prepare a tailor-made product and then relevantly place it in the market so that the adoption is effortless and does not create any kind of hindrance,” said Sunil Soni, CGM-IT, CIO, Punjab National Bank.

But it’s not easy, as Soni says, “A lot of market research and time goes into preparing a tailor-made product for the benefit of a segmented customer base, it is not the case of ‘one shoe- fits all’.

Discouraging customers from branch visit

As digital usage progresses, the bank would like to discourage customers from visiting banks.

“In today’s scenario, the PNB is following the type of work culture where we discourage footfall at the branches and encourage a do-it-yourself kind of an approach,”

He added that to achieve this goal they are focusing on emerging technologies.

“We are adopting technologies like machine learning, data analytics. AI and RPM, one by one. However, if you look at providing solutions, it is important to have an interplay of all these facilities,”

With a great customer base, comes great responsibility

PNB, being the second-largest PSU bank in the country, has around 11,000 branches across different geographies. Also, the bank’s wide customer base includes people from deep rural areas as well as those living in metropolitan cities. Serving such customers digitally is a big challenge.

“If we do it in the metropolitan cities, we would create a rich product like the ‘PNB one mobile banking App’. However, in a rural area internet or receiving good bandwidth could be a challenge, even availability of a branch could be a question, in such case we will have to prepare a business model that runs on a very thin network, like ‘PNB Lite’ that provides all the basic services that the people from that segment will require,” Soni said.

Banking on the millennial

Soni adds that customer engagement is the key.

“Customer engagement is the utmost priority. If banks create products and there is minimal adoption then the whole work and the capital goes to the drain and also loses an opportunity of the potential revenue,”

For PNB the millennials are the large customer base which is also the target base of customers for all the BFSI companies.

“Almost 60% of all the transactions at PNB are done by millennials. This segment doesn’t have time to walk back and look at our brick and mortar structure. We are focusing on developing a product that provides everything to our customers under one umbrella through our Mobile Banking App. Engaging with the service providers, merchants and sellers and even with companies like Swiggy will help millennials to make use of the app for almost all their day to day requirements, It will be an enriching marketing experience for us as well,” Soni explains.

PNB building modern banking

Soni says that the bank is using the topmost technologies. Currently, voice bots are being used for the PNB ONE app. Bots are encouraging collaborative banking where the availability of a customer service executive does not affect the banking experience of the customer and fastens the response time for a query. Some of our call centres or phone banking services are also being augmented with bots to provide utmost convenience and make banking faster. We are actively looking at the constant feedback from our customers on the websites and improving upon every suggestion. The complaints registered by the customers are resolved on a priority basis,”

Changes to the traditional IT model

“We have shifted from a conventional waterfall model to an agile model of programming. Earlier it would take us months to prepare a model and launch it, whereas today it hardly takes us a few weeks to bring about a small change or introduce a new product completely.” Soni explained

This article is based on the fireside discussion with Sunil Soni, CGM-IT, CIO, PNB at ETCIO BFSI Conclave.



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Should PayPal be worried about your country’s central bank?

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The world of money is about to leap into the great unknown of central bank digital currencies. Will it land in a utopia of universal financial inclusion or crash into a dystopia of instability? Perhaps the experiment will upend banking as we know it, or turn out to be one big damp squib, unable to compete even with an existing private network like PayPal Holdings Inc?

Any of these outcomes are possible. Technology is enabling monetary authorities to give ordinary people access to a kind of electronic cash they have never had before. Digital money won’t feel new: It will offer instantaneity, just like PayPal, Alipay or WeChat Pay do. Like now, the purchasing power will sit in a smartphone wallet tied to a regular bank account, allowing funds to be swept in and out. But unlike now, the balance in the wallet will be sovereign liability. Just like cash.

Why PayPal’s decision to call it quits in India doesn’t come as a surprise

This difference will matter in case of bank runs. As you and a hundred others queue up to take all your savings out of a commercial institution that’s suddenly rumoured to be unsafe, you can buy a book online using your new electronic cash — that is, make a payment without debiting your bank account — and Amazon.com Inc’s bank won’t have to worry about getting remunerated.

A big relief? Let’s be reasonable. In a functioning 21st-century state, where there are no breadlines or snipers shooting from rooftops, no seller frets about small payments getting blocked because of bank failures. Deposit insurance takes care of that. Any advantage from possessing the mother of all money — one that extinguishes all claims of the merchant on you, yours on your bank, or the seller’s bank’s on your bank — is irrelevant. PayPal linked to a regular bank account works just fine in ordinary situations.

Digital Payments in India to grow to 71.7% of all payment transactions by 2025: Report

Competitive pressures

But supply can create its own demand. Already the competitive pressures are mounting: the People’s Bank of China is expected to roll out its electronic yuan, e-CNY, as early as next year. If it doesn’t, then the Chinese might start using Bitcoin as a store of wealth and a means of payment. If the US Federal Reserve doesn’t respond, Americans might take to e-CNY, a direct claim on the People’s Bank of China. A new survey by the Bank for International Settlements shows that central banks are worried about residents shunning money they alone can print. “Widespread adoption of a foreign retail CBDC,” as BIS General Manager, Agustin Carstens, said in a recent speech, can be understood “as ‘digital dollarisation,’ or insert the currency of your choice here.”

It’s the prisoner’s dilemma and the quandary of how and whether to cooperate. No central bank has to issue its own digital cash if no other state or private actor introduces tokens that act like money. That fork in the road is already behind us, thanks to cryptocurrencies going mainstream. So authorities in most countries may have no choice except to jump on the bandwagon.

The question then is, should they make their offering attractive? Cash doesn’t pay interest, but central bank digital currencies can. That’s because they’ll be tied to accounts held with monetary authorities. If they do pay interest, we may not want to keep money in a vanilla savings account. What happens next is anybody’s guess. Some researchers argue that this will be the harbinger of the central bank “as a deposit monopolist, attracting all deposits away from the commercial banking sector.” Others are more sceptical: “It is unlikely that central banks would be able to offer the same spectrum of services that are associated with a private bank account.”

Not always negative

There’s a third view: Unless central banks also start underwriting loans, banks may do just fine. Yes, lenders will have to pay more for deposits, and seek out bottom-of-the-pyramid customers they currently ignore. But greater financial inclusion will be a good thing. As long as the deposit rate is lower than the interest they receive on reserves parked with the monetary authority, and that in turn is lower than what they can charge on loans, banks can survive. Official digital currencies “need not have a negative impact on bank lending operations if the central bank follows an interest rate policy rule,” concludes David Andolfatto, an economist at the Federal Reserve Bank of St. Louis, adding that well-designed official electronic cash “is not likely to threaten financial stability.”

A fourth scenario

Consider a fourth scenario: digital currencies that are truly international, not confined to the technology choices of national payment systems. As Peter Bofinger and Thomas Haas of the University of Wuerzburg in Germany write: “The benchmark is set by PayPal which is the ‘elephant in the room’ of global payments.” Who’ll want a piece of this PayPal beater? Diem, as the former Facebook Inc-sponsored network is now called, could be a customer. Diem will issue private cryptocurrencies that are pegged to legal tenders and, therefore, less volatile than Bitcoin. Instead of keeping reserves with different monetary authorities to back its stablecoins, Diem can simply buy the required e-CNY, FedCoin, and the rest. Provided these different digital currencies are integrated on a single platform.

That’s not happening soon, not when central bank electronic cash is being viewed as a Cold War-type space race between superpowers. Monetary technocrats may not share their political masters’ chest-thumping nationalism, but they won’t be able to keep it at bay.

PayPal can rest easy for now.

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