CBDC anonymity will impact bank lending: Bank of Canada

Privacy has been the most debated aspect of central bank digital currencies (CBDCs). The focus has been exclusively on how this privacy affects users, but in its new report, the Bank of Canada (BoC) studied how business anonymity will impact commercial banks’ ability to lend to entrepreneurs.

Titled ‘CBDC: Banking and Anonymity,’ the report acknowledged that the level of
anonymity will significantly determine whether entrepreneurs turn to a digital dollar if it launches. In turn, it will sway the commercial banks’ ability to appraise their clients and could affect the lending cycle.

Entrepreneurs are likely to favor a CBDC that offers them high anonymity, allowing them to share their financial records only at will. Currently, cash provides this anonymity to businesses. Conversely, card payments are transparent, and banks screen them to determine a business’s creditworthiness.

While many have suggested that the solution is finding a compromise, the BoC report argues that “moderate anonymity in CBDC leads to an inefficient pooling equilibrium. To avoid this, CBDC anonymity should be either low, reducing attractiveness, or high, discouraging bank lending.”

The report notes two types of entrepreneurs: high-value and low-value. High-value entrepreneurs prefer cards in today’s payment landscape and would gravitate toward a less anonymous CBDC.

Low-value entrepreneurs who prefer cash today would be lured by an anonymous CBDC.
Without anonymity, this group would default to cash even if the CBDC offered other benefits.

On the other hand, commercial banks would lean toward reduced anonymity as this lowers their risk when lending to customers.

BoC suggests that in a world where the CBDC is highly anonymous, banks can overcome the challenge by tightening their credit standards, intensifying their loan scrutiny, and rethinking their risk-assessment models.

BoC has continued to conduct research on a CBDC, although, like most of its peers, it remains non-committed to issuing one. In a paper published last month, it dismissed fears of bank disintermediation by the digital dollar, arguing that banks will remain critical for the extra services and products they offer.

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: CBDCs are more than just digital money