A central bank digital currency (CBDC) would only pose a serious threat to the commercial banking system if it offered consumer interest and complementary banking products like mortgages, a new study by the Bank of Canada (BOC) has found.
Titled “Central Bank Digital Currency and Banking Choices,” the study delved into how a digital Canadian dollar would affect bank deposits. Published by BOC economists Jiaqi Li, Andrew Usher, and Yu Zhu, the study dismissed disintermediation concerns, noting that commercial banks will remain attractive to consumers as they offer a load of other financial products.
In particular, the study found that Canadians value their banks for two products: credit facilities such as mortgages and credit cards. It cited a previous paper that found 56% of mortgage borrowers and 45% of credit card holders select their deposit bank for these services. This is unlikely to change significantly, even with the launch of a digital dollar.
According to the paper, a CBDC that bears no interest, has no complementary financial products, and no service locations—such as bank branches—would only attract 1% of bank deposits.
Meanwhile, it stands a better chance if the digital dollar uses commercial bank branches as service locations. Adding Canada Post offices to its arsenal as service locations—there are over 6,200 offices—would make it a more attractive prospect. The study estimates that this CBDC setup would attract 12% of the deposits.
The disintermediation effect will further be reduced by limiting how much digital dollars Canadians can hold. The central bank argues that even a high holding limit like CAD 25,000 (US$18,590) would halve the share of liquid assets held in the CBDC.
While the BOC hasn’t settled on a holding limit, $18,590 would be much higher than with most other countries’ CBDC trials. For instance, the European Central Bank (ECB) has proposed a $3,200 limit for the digital euro to reduce the risks of bank disintermediation.
While the risks of disintermediation are low in the BOC’s estimation, the potential benefits of a CBDC are massive. The top bank believes that those living in rural areas will benefit the most as they are the most likely to lack banking services.
“The difference is larger when the service locations of the CBDC include the Canada Post offices, which are more evenly distributed across rural and urban areas compared to bank branches,” the paper added.
While the BOC moves on with its feasibility tests for the potential digital dollar, its most significant task will be to bring Canadians on board. A December 2023 study found that most citizens distrust a CBDC, with financial privacy as the primary concern.
To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.
Watch: Building CBDC systems on Bitcoin
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