The rise of Central Bank Digital Currencies (CBDCs) raises fundamental questions about the role of commercial banks in our financial system. These digital currencies issued by central banks combine the reliability of government-backed money with the efficiency of modern payment technologies. Central banks around the world are exploring the feasibility of a CBDC, as seen in China and the European Union. This article examines what CBDCs actually are, how they can be implemented, what advantages and risks they bring and what their potential impact is on the survival and function of commercial banks.
What are CBDCs
Central Bank Digital Currencies are digital forms of national currency that are issued and guaranteed directly by the central bank. This makes CBDCs a secure alternative to traditional means of payment such as cash and the money held in commercial bank accounts. In the current system commercial banks manage the money of citizens and businesses, which is only indirectly linked to the central bank. With CBDCs, the risk of bankruptcy of intermediary commercial banks is removed since the central bank itself guarantees the value. Thanks to recent innovations in digital technologies such as blockchain and mobile payments it has now become technically possible to introduce national digital currencies.
Direct or indirect
The implementation of a CBDC can take place in two fundamentally different ways: direct or indirect. The difference lies in the level of involvement of commercial banks in their contact with the end user. In a direct model, citizens and businesses have an account or digital wallet directly with the central bank, while in an indirect model commercial banks remain the main point of contact for users.
Direct
In the direct model, the central bank itself becomes the financial service provider for citizens and businesses. Consumers would open a digital wallet with the central bank where they store their digital money. All transactions would then go directly through the central bank’s network without the involvement of a commercial bank. This would mean the central bank is not only responsible for issuing money but also for maintaining accounts, customer service, and transaction processing. Although this model offers maximum transparency and control for the government and could provide more stability in times of crisis, it also carries significant risks. Commercial banks would largely be sidelined, which could lead to a decline in competition, innovation, and customer-focused services. It would also mean an unprecedented expansion of the state’s role in payment systems.
Indirect
In the indirect model, also called the two-tier model, the existing financial ecosystem largely remains intact. The central bank creates the digital currency and guarantees its value, but distribution and customer contact are handled by commercial banks or other recognized financial institutions. Citizens would still have a wallet or digital account with their own bank, but the underlying digital euro or currency would remain a direct claim on the central bank. This model is considered more attractive by many central banks including the European Central Bank, as it provides stability while respecting the role of existing banks. It avoids a direct threat to the current banking system, encourages cooperation between the public and private sectors, and allows for a phased introduction with room for technical adjustments.
The Benefits of CBDCs
- More efficient payments: Since a CBDC enables transactions without the involvement of commercial banks or other payment processors, the steps in the payment process are significantly reduced. This results in faster payments and lower transaction costs. This could represent a revolutionary improvement, especially for cross-border payments, which are often slow and costly.
- More reliability: A CBDC is a claim on the central bank, which means there is no risk of the issuing party going bankrupt. This is in contrast to money in a commercial bank account, where the balance depends on the financial health of that bank. This increases the safety of savings and can strengthen trust in the financial system. At the same time, commercial banks will need to distinguish themselves more in other areas such as customer service, advisory services, and digital innovation.
- Financial inclusion: For people without access to traditional bank accounts, for example in developing countries or underbanked populations, a digital currency issued by the central bank could offer a solution. With just a mobile phone, they could participate in the financial system through a digital wallet, without relying on a commercial bank or credit score.
The Drawbacks of CBDCs
- Loss of privacy: Because CBDCs exist in digital form and are managed through digital infrastructures, transactions can theoretically be tracked. Depending on the design of the CBDC, this could lead to a situation where the government or central bank has full insight into a person’s payment behavior, raising fundamental questions about financial privacy and individual freedom.
- Extensive government control: A CBDC could theoretically be made programmable. This means the government could set conditions on how money is spent or even block or reclaim money. This creates risks of abuse of power or excessive regulation of daily economic activity.
- Social inequality: Not everyone is digitally literate or has access to modern technology. The elderly, people with disabilities, or those in areas with poor digital infrastructure could be excluded from the system. This could increase existing inequalities within the financial system rather than reduce them.
- Security risks: While central banks adhere to high cybersecurity standards, digital infrastructure remains vulnerable to cyberattacks, technical failures, and sabotage. A successful attack on a CBDC system could have far-reaching consequences for trust in money and the stability of the financial system.
- Inflation and value shifts: Because it becomes technically easier for central banks to bring money into circulation via CBDCs, there is a risk that monetary discipline may weaken. This could eventually lead to increased inflationary pressure. Additionally, in a crisis, everyone could massively transfer their money from commercial banks to the central bank (a digital bank run), which would cause instability in the banking sector.
Examples
- China: Currently, China is running pilot programs in major cities and during large events with the use of a digital yuan. The Chinese central bank releases digital yuans to selected commercial banks, which then distribute them to citizens and businesses via digital wallets. The system is characterized by a high degree of central control: the central bank can later add programmable conditions to the money and has full access to users balances and transactions. This makes the system efficient but also raises concerns about privacy and state control. China is leading the way in the practical implementation of a CBDC and is using the project as a tool for monetary policy, economic stimulation, and geopolitical influence.
- EU: Since November 2023, the European Union has been investigating the feasibility of a digital euro. The project is currently in the preparatory phase with a focus on regulation, design and technical infrastructure. A final report is expected in October 2025 which should provide clarity on the implementation. The European Central Bank (ECB) has indicated its preference for an indirect model, where commercial banks continue to play a central role in the distribution of the digital euro. Key objectives include strengthening Europe’s monetary sovereignty, reducing dependence on foreign payment processors like Visa and Mastercard and improving the accessibility of digital payments. At the same time there is significant hesitation within the EU: many parliamentarians and experts express doubts about the need for the digital euro, its cost, and its potential impact on the existing financial ecosystem. Privacy and civil rights are also prominently mentioned as critical points in the debate.
The Future of Commercial Banks and CBDCs
Although CBDCs will play a key role in the future of the financial system, it seems unlikely that a fully direct model where central banks themselves carry out all financial services will become the standard. This is because such a model would represent a major shift from the current banking system. Commercial banks fulfill an essential role as intermediaries between the central bank and the public. Many central banks such as the European Central Bank prefer an indirect model. In this model the distribution of digital currency continues to take place via commercial banks. This offers the necessary stability and keeps competition and innovation within the private sector intact. The role of commercial banks therefore appears to be largely secure. They can continue to focus on their traditional tasks such as providing loans, offering customer service and developing financial products. At the same time commercial banks can improve their services by collaborating with the new digital infrastructures made possible by CBDCs. However, the future of commercial banks depends on their ability to adapt to digitalization and take advantage of the benefits that CBDCs bring. The coming years will reveal how the financial ecosystem continues to evolve. It seems likely that commercial banks will continue to play an important role, albeit in an increasingly digital and technologically advanced landscape.
Conclusion
CBDCs represent an important development in the financial system. They offer benefits such as more efficient payments, broader access to financial services and greater control for central banks. At the same time, they bring risks in the areas of privacy, cybersecurity, and the role of commercial banks. The success of CBDCs depends on careful implementation and the maintenance of public trust.
