Master Thesis Digital Banking & Financial Technology
Yüklə 0,77 Mb. Pdf görüntüsü
|
|
Crisis and Response: An FDIC History, 2008 - 2013
. [online] Fdic.gov. Available at: https://www.fdic.gov/bank/historical/crisis/. Garicano, L. (2020). Two proposals to resurrect the Banking Union: the Safe Portfolio Approach and SRB+ . [online] Available at: https://www.bruegel.org/sites/default/files/wp-content/uploads/2020/02/Two- proposals-to-resurrect-the-Banking-Union-by-Luis-Garicano.pdf . Mecatti, I. (2020). Deposit Guarantee Schemes and Bank Crisis Management: Legal Challenges Arising from the Actual EU Legal Framework. SSRN Electronic Journal . doi: https://doi.org/10.2139/ssrn.3740362 . Meehl, A. (2022). Bailouts, Bail-ins, and Banking Industry Dynamics . [online] Available at: https://www.ecb.europa.eu/pub/conferences/ecbforum/shared/pdf/2022/meehl_paper .en.pdf. Restoy, F. (2016). The challenges of the European resolution framework Closing address of the Conference ‘Corporate governance and credit institutions’ crises’, Mercantile Law Department, UCM (Madrid) . [online] Available at: https://www.bis.org/review/r161220d.pdf. 72 Restoy, F. (2021). How to improve funding of bank resolution in the banking union: the role of deposit insurance. www.bis.org . [online] Available at: https://www.bis.org/speeches/sp210511.htm . Restoy, F. (2022). The pressing need to reform the European crisis management framework. www.bis.org . [online] Available at: https://www.bis.org/speeches/sp220224.htm . Restoy, F., Vrbaski, R. and Walters, R. (2020). Bank failure management in the European banking union: What’s wrong and how to fix it . [online] Available at: https://www.bis.org/fsi/fsipapers15.pdf . Single Resolution Board (2017). MREL . [online] www.srb.europa.eu. Available at: https://www.srb.europa.eu/en/content/mrel . Single Resolution Board (2022a). Minimum requirement for own funds and eligible liabilities (MREL) . [online] Available at: https://www.srb.europa.eu/system/files/media/document/2022-06-08_MREL_Track- Changes.pdf . Single Resolution Board (2022b). SRB publishes updated guidance documents for bail-in operationalisation - Single Resolution Board . [online] Single Resolution Board. Available at: https://www.srb.europa.eu/en/content/srb-publishes-updated-guidance- documents-bail-operationalisation . Visco, I. (2021). The crisis management framework for banks in the EU: how Can we deal with small and medium-sized banks?, SUERF Policy Brief .:. SUERF - The European Money and Finance Forum . [online] SUERF.ORG. Available at: https://www.suerf.org/suer-policy-brief/20419/the-crisis-management-framework-for- banks-in-the-eu-how-can-we-deal-with-small-and-medium-sized-banks . 73 Chapter 5: Central Bank Digital Currencies 5.1. Definition As a medium of exchange, money has evolved from shells, dogs teeth, knotted fabric, precious metals, banker's notes, cash to cryptocurrency (Davies, 2010). While cryptocurrency is still a largely unregulated area, the introduction of the Central Bank Digital Currencies (CBDCs) will manifest the beginning of a new monetary era (Laboure et al., 2021). Now, the Bahamas has already implemented CBDC in its territory, and China has recently completed two CBDC tests. The CBDC wallet app is now available in Suzhou, Xiongan, Shenzhen, and Chengdu, and the People's Bank of China and the Hong Kong Monetary Authority has begun 'technical testing' for cross-border use of e-CNY. Uruguay has also completed a CBDC pilot test. CBDC is a virtual form of a country's fiat currency issued by the central bank (Yao, 2018). CBDC was initially called a Digital Fiat Currency (DFC) (Krylov et al., 2018), which draws inspiration from famous crypto assets such as Bitcoin, Ethereum, Binance Coin, among others. In 2013, Shoaib et al. (2013) introduced the alternative terms of Official Digital Currency (ODC) and the Official Digital Currency System (ODCS). Central bank Digital currencies are a type of digital currency issued by the central bank of a country. They are comparable to cryptocurrencies with the exception that their value is fixed by the central bank and is equivalent to the country's fiat currency. Numerous nations are currently creating CBDCs, and a few have even implemented them. Due to the fact that so many countries are studying ways to transition to digital currencies, it is crucial to comprehend what they are and what they signify for society (Seth, 2021). Government-issued fiat currency is not backed by a tangible commodity such as gold or silver. It is considered legal tender that can be exchanged for goods and services. Technology has enabled governments and financial organizations to supplement physical fiat currency with a credit-based paradigm in which balances and transactions are digitally recorded. Real cash is still extensively used and accepted; however, its use has declined significantly in several affluent nations, and this tendency increased during the COVID-19 epidemic. The introduction and development of cryptocurrencies and blockchain technology have increased interest in cashless societies and virtual currencies. Consequently, governments and central 74 banks around the world are investigating the use of government-backed digital currencies. When and if they are deployed, these currencies will be backed by the government that issued them, just like fiat currency (Seth, 2021). Many people lack access to financial services in the United States and numerous other nations. 5% of adults in the United States do not have a bank account. An further 13% of adults in the United States have bank accounts but utilize costly alternative services such as money orders, payday loans, and check cashing services. CBDCs are intended to give organizations and customers with confidentiality, transferability, ease, accessibility, and financial security. CBDCs could also reduce the need for complicated financial system maintenance, slash cross- border transaction costs, and provide lower-cost options to people who now use alternative money transfer methods (Seth, 2021). A CBDC also gives the means for a country's central bank to undertake monetary policies in order to ensure stability, limit growth, and impact inflation. Digital currencies issued by central banks would also minimize the dangers associated with utilizing digital currencies in their current form. The value of cryptocurrencies is highly volatile and continually fluctuating. This unpredictability could result in severe financial strain for many individuals and have an impact on the economic stability as a whole. Government-backed and central bank-controlled CBDCs would provide homes, consumers, and companies with a stable way of trading digital currency (Seth,2021). Image 12 Possible Future: The introduction of CBDC could remove risk from users, and allow banks to focus on services. https://blog.digitalasset.com/developers/what-is-a-central-bank-digital-currency-and- why-should-people-prefer-cbdc-over-bank-accounts 75 According to the literature, the main goals of CBDCs are (Edwards, 2021): (a) Improve the efficiency (and reduce the cost) of the payment system. (b) Encourage financial inclusion, especially among the poor. (c) Facilitate and reduce the costs of cross-border transactions. To these generally accepted objectives, the European Central Bank has added that the implementation of CBDCs would provide a new and more efficient policy transmission channel for monetary policy, while supporting ‘improvements in the overall cost and ecological footprint of the monetary and payment system’ (Edwards, 2021). A CBDC is a government credit-based digital currency, thereby reducing their risks. Therefore, some economic agents and individuals might prefer to transfer money from commercial banks to CBDCs during financial crises (Sinelnikova- Muryleva, 2020). Many regulators and re- searchers regard a CBDC as a nationally issued 'tablecoin', and believe it can balance the banking system (Sissoko, 2017) and positively impacts financial stability (Larina & Akimov, 2020; Copeland, 2019; McLaughlin, 2021; Buckley et al., 2021). Indeed, Zams et al. (2020), using an analytic network process and the Delphi method, demonstrated that the cash-like CBDCs model is the most suitable CBDCs design for Indonesia because it can improve financial inclusion and reduce shadow banking. Tong and Jiayou (2021) investigated the effects of the issuance of digital currency/electronic payment on economics based on a four-sector DSGE model, and conclude that CBDCs can mitigate the leverage ratio and the systemic financial risk. Barrdear and Kumhof (2016) examined the macroeconomic consequences of launching CBDCs by a DSGE model, and found that CBDCs issuance 30%'s GDP, against government bonds, could be permanently raised by 3%. Additionally, Fantacci and Gobbi (2021) focused on the geopolitical, strategic, and military impacts of CBDCs. However, CBDCs are new research fields within digital currency and fintech domain, and a few paper available to date can be roughly allocated into five main sub-groups. The first group discusses, among other aspects, the definition, characteristics, classification, main models, and implications of the CBDCs variants, and the potential advantages and risks of its introduction (Yao, 2018; Masciandaro, 2018; Cunha et al., 2021; Kochergin, 2021; Li & Huang, 2021; Allen et al., 2022). While the above mentioned researchers hold positive attitudes towards CBDCs, Kirkby (2018) criticised CBDCs as they would increase the central bank's costs for the whole money supply system. The second group of studies focuses on the CBDCs' design theory, technological innovation, and model optimisation. Sun et al. (2017) proposed a multi- 76 blockchain data centre model for CBDCs in order to help central banks manage the issuance of currency, prevent double-spending issues, and protect user privacy. Qian (2019) introduced a CBDC issuance framework designed for for- ward contingencies in order to prevent the currency from circulating beyond the real economy. Wagner et al. (2021) discussed and proposed a potential blueprint for a digital euro and proved its possibility. The third group illustrates CBDCs' security and privacy. Tronnier (2021) and Borgonovo et al. (2021) demonstrated the significance of anonymity for increasing the overall attraction of CBDCs' social medium payment. The fourth group analyses the impacts of CBDCs on monetary systems and policy. Meaning et al. (2021) discussed CBDCs' potential impact on monetary transmission mechanisms, and found that monetary policy can operate as it does now by adjusting the price or quantity of CBDCs. Shen and Hou (2021) applied a qualitative analysis of China's CBDCs and their impacts on monetary policy and payment competition, and argued that CBDCs have potential to transform the field completely rather than be a mere regulatory toolkit, especially when CBDCs will be adopted at a large-scale. To put it simply, some scholars hold positive views towards CBDCs on monetary policy. They have argued that CBDCs are useful complements to monetary and reserve policy (Davoodalhosseini, 2021), and that they have the potential power to strengthen the monetary transmission mechanism and bear interest (Stevens, 2021). However, other studies have discussed CBDCs' monetary risks, for example, Viuela et al. (2020) listed the sources of these risks, and presented both solutions and suggestions for further CBDCs research. The fifth group investigates the relationships between CBDCs and banking, including commercial and central banking. Cukierman (2020) provided two proposals CBDCs' implementation, i.e the moderate and radical. The former suggests that only the banking sector can have access to deposits at central banks, while the latter suggests that the whole private sector could hold digital currency deposits at central banks. Cukierman supported the radical proposal due to its ability to condense the banking system and reduce the need for deposit insurance. Furthermore, some discussions have centred around the new role of central banks in the digital currency era. Some scholars believe that CBDCs can upset commercial banking because central banks are more stable and can play an essential role in reducing risks in economic transactions (Yamaoka, 2019; Zams et al., 2020; Sinelnikova-Muryleva, 2020). This could possibly even lead to commercial banking panic (Williamson, 2021) or allow central banks to become deposit monopolists (Fernandez-Villaverde et al., 2021). None of these studies have linked CBDCs to financial markets. One possible 77 reason for this research gap is the lack of a time series proxy that relates to the CBDCs. However, several scholars have shown that an index of news coverage frequency can serve as a proxy to reflect the uncertainty of one economic or financial objective (e.g., economic policy, cryptocurrency policy, or cryptocurrency price) (Baker et al., 2016, Huang & Luk, 2020; Lucey et al., 2021), or draw public attention to an economic or financial objective (e.g., cryptocurrency, cryptocurrency environmental, P2P lending) (He et al., 2021; Smales, 2022; Wang et al., 2022). These papers further confirm that the uncertainty or attention indices mentioned above can act as validity and efficiency proxies by investigating their impacts on micro or macroeconomic variables. This research gap is the motivation behind our work to uncover the effects of CBDC news on financial markets. This is achieved by introducing new CBDC indices to capture existing trends and reflect the variations of CBDC uncertainty and attention by gathering a large amount of CBDC news items and analysing the interconnections between the CBDC indices and financial market variables using a variety of quantitative techniques. 5.2. Types of CBDCs Two broad categories of CBDC can be distinguished: general-purpose or retail (CBDC-R) and wholesale (CBDC-W) (Kulkarni, 2019). Image 13 The two main types of CBDCs https://corporatefinanceinstitute.com/resources/cryptocurrency/central-bank-digital-currency-cbdc/ 78 Retail CBDC (e-R) may be utilized by the private sector, non-financial customers, and businesses, whilst wholesale CBDC (e-W) is exclusively meant for select financial institutions. Retail CBDC is an electronic version of money intended primarily for retail transactions, whilst Wholesale CBDC is meant for the settlement of interbank transfers and related wholesale operations (Kulkarni, 2019). Wholesale CBDCs would be deployed largely by financial institutions like banks. The usage of CBDCs would enable banks to conduct faster and more automated payments. Transnational transactions may become more efficient and trustworthy. In their present form, payment settlement systems are limited to a particular jurisdiction or currency. Using blockchain technology might potentially make transactions more efficient, trustworthy, and rapid (CFI Team, 2023). CBDCs for sale at retail would mostly be utilized by individuals. Consumers could effectively use them as digital cash, secure in the knowledge that they are issued and backed by the country's central bank. This innovation may supplant the requirement to carry physical currency and minimize the economic rents associated with dealing in the current financial system (CFI Team, 2023). CBDC's structure can either be "token-based" or "account-based." A token- based CBDC is a bearer instrument, similar to banknotes, meaning that whoever is holding the tokens at any one time is presumed to be the owner. In contrast, an account-based system would require the maintenance of records of all CBDC holders' transactions and balances, as well as the identification of the financial balance owners. Given the qualities offered by both types of CBDCs, a token-based CBDC is favored for CBDC-R since it would be closer to physical cash, but an account-based CBDC may be chosen for CBDC-W (Kulkarni, 2019). 5.3. Cryptocurrency Vs CBDC CBDC initially refers to the digital form of a country's fiat currency, which is issued by the country's central bank. Even though it is in digital form, it can be exchanged for the country's fiat money. This money is the central bank's liabilities. Central banks retain complete control over its supply and transactions are documented in a centralized ledger. CBDC has the same purchasing power as the country's fiat currency (notes or coins). In contrast, cryptocurrency is a digital currency designed to act as a medium of exchange. In addition to regulating the 79 creation of new units of a particular digital currency, it employs encryption to secure and validate transactions (Kulkarni, 2023). Cryptocurrencies are decentralized, independent digital currencies that operate without a predetermined value or backing. Bitcoin (BTC) and Ethereum (ETH) are examples of cryptocurrencies in this category. By contrast, CBDC is supported by central banks. For instance, the RBI has given its CBDC the name "Digital Rupee." The proposed CBDC of China is digital yuan (e-CNY). Certain cryptocurrencies, known as Stablecoins, are tied to the dollar but are supported by private businesses. Examples include Tether (USDT), USD Coin (USDC), and Diem. Moreover, while cryptocurrencies use an open network that does not require permission, CBDCs employ a private Blockchain network that requires authorization. Also, users stay anonymous when transacting on the network with bitcoins. Yet, CBDCs will be linked to a person's bank account, which will contain their personal information. Moreover, CBDCs are administered by a central authority, which simplifies network scaling. In contrast, all nodes on the network must authorize any changes to the cryptocurrency network. If the network needs to expand, but the nodes differ on how to proceed, this could be problematic (Kulkarni, 2023). 5.4. Benefits A CBDC is of great importance over conventional cryptocurrencies and fiat currencies when studying. First, from the perspective of payment, it saves costs, prevents counterfeiting, and strengthens the authority of legal tender while enhancing the inclusive character of the payment system (Sun et al., 2017). It also optimises the payment function of legal tender, reducing the reliance on payment services on business banks and private sectors, thereby decreasing the burden and pressure of supervision on the central bank (Qian, 2019). Second, CBDCs can benefit to the monetary supervision and regulation. The structured currency circulation data allows total amount of money supply to be regulated precisely (Fernandez-Villaverde et al., 2020). This ameliorates the dilemmas facing modern monetary policies, such as inefficient policy transmissions, difficult regulation of conversion periods, the flow of money from the real economy to the virtual one, and the failed realisation of expected requirements by monetary policies. Moreover, capital flow information can be fully and quickly investigated, thereby aiding anti-corruption, anti-money laundering, anti- terrorist financing, and anti-tax evasion efforts (Tronnier, 2021; Dupuis et al., 2021). Third, CBDCs have the potential to promote financial market stability by adjusting 80 monetary, mitigating financial systemic risk, reducing shadow banking, among others (Larina & Akimov, 2020; Copeland, 2020; Zams et al., 2020). The Fed suggests that a major advantage of providing widespread access to a CBDC would be the introduction of credit- and liquidity-risk-free digital money into the system. This risk applies to all other kinds of digital currency, including stablecoins. The report suggests that such a significant advantage would level the playing field, encourage innovation among private companies, reduce costs, and ultimately accelerate the payments process. The Fed also observes that a CBDC has the potential to expedite cross-border payments through the use of new technologies, the introduction of simpler distribution routes, and the creation of further cross- jurisdictional collaboration and interoperability opportunities (Hoenig & Knight, 2022). Although these advantages are impressive, they are not contingent on the Fed making a CBDC available to the public. The private sector has been mostly responsible for the development of digital currencies, as opposed to the Federal Reserve. The private sector has brought much quicker and simpler payment processing. Venmo, Square, and Stripe are examples of new companies that have disrupted existing legacy systems and substantially improved the payments system without government assistance. As it pertains to cross-border payments, the private sector has also significantly improved speed and ease (Hoenig & Knight, 2022). In addition, while it is true that a CBDC would be exempt from credit and liquidity issues, this advantage is exaggerated. Secondly, it is uncertain whether the difference in credit and liquidity risk between a CBDC and private alternatives, such as private coinage backed by safe assets or commercial bank money with FDIC protection, is significant enough to warrant a CBDC. Second, there are policy alternatives for reducing liquidity and credit risks associated with payments that do not entail the issuance of a CBDC. Such hazards can also be mitigated by insuring bank deposits to the full extent of FDIC coverage. Lastly, it is not certain that a CBDC will lower overall credit and liquidity risk. With the implementation of a CBDC, banks would have to rely on alternative funding sources to cover their typical funding needs, and these new sources would continue to be subject to credit and liquidity issues. Hence, a CBDC would serve to transfer risks rather than eliminate them (Hoenig & Knight, 2022). It is also proposed that the creation of a dollar-denominated CBDC would bolster or better secure the United States' position as the issuer of the world's reserve currency. With China's creation of its own national CBDC, which is viewed as a bid to make its currency a worldwide medium of trade and settlement, this viewpoint has gained prominence. To be a reserve currency, however, a CBDC is 81 neither essential nor sufficient. A sustainable reserve currency necessitates an economic structure that is not just well-developed, but also operates under the rule of law and permits the free flow of capital. The American financial system possesses these characteristics and is one of the most dependable mechanisms for international settlements, which are also conducted digitally. The introduction of a CBDC would have minimal effect on these characteristics. In terms of the United States' national and international role in payments, the FedNow initiative's development of real-time settlement has become increasingly important (Hoenig & Knight, 2022). Providing a CBDC to the general public and businesses would make it accessible to unbanked folks. However, the logistics of offering a CBDC directly, via banks, or, as some have suggested, via the local post office would be a huge issue for all parties. Offering a subsidy to ensure free access to a CBDC and related banking services for the 7.1 million unbanked households would be challenging and possibly unpopular. However, doing so would raise the question of whether a substantial enough fraction of the unbanked population would join the system for it to be cost-effective. Not only do many unbanked persons mistrust banks, but they also mistrust the Federal Reserve and the federal government. As a result, although assisting unbanked individuals is a commendable objective, it entails a hefty price tag, given that some unbanked households may be reluctant to use the service (Hoenig & Knight, 2022). Image 146 Bank of International Settlements, The CBDC Pyramid. https://doi.org/10.1080/05775132.2021.2004738 82 Wang et al. (2022) developed and made available two CBDC indices the CBDC Uncertainty (CBDCUI) and the CBDC Attention (CBDCAI), that can be used to track CBDCs’ trends and variations. Their data covers the main period of CBDC development and the period of the most active discussion of this new asset in the media, i.e. from January 2015 to June 2021. They empirically examined the impact of CBDC news on the financial markets. Their indices capture CBDC trends and uncertainties as they are able to react to major relevant events. For example, their indices spiked near new CBDC announcements, digital currency flash-news, and main policy debates. Second, the paper reports that CBDCUI and CBDCAI indices had a significantly negative effect on the volatilities of the MSCI World Banks Index, USEPU, and FTSE All-World Index, where the volatilities of the financial variables reacted more strongly to shocks transmitted from the CBDCUI. Third, the paper by Wang et al. (2022) presents the historical decomposition results, that show that the cumulative positive and negative effects of CBDCUI disturbances tend to be larger than those of the CBDCAI on the financial variables. Positive news items and government policy announcements can have a significant negative affect on the CBDCUI historical decomposition results, i.e. decreasing the uncertainty around CBDC introduction. 5.5. Disadvantages While a CBDC could provide some benefits, it may also bring several significant challenges for society. First, CBDCs could exacerbate financial uncertainty during periods of economic stress (Ferrari et al., 2020; Sinelnikova-Muryleva, 2020). Without effective regulations, individuals can hold CBDCs indefinitely. Therefore, in the event of a crisis, individuals or economic agents could try to substitute CBDCs for bank deposits, as they may be perceived as less risky (Williamson, 2021). This behaviour may lead to bank runs and financial instability. Second, similar to the first point, CBDCs could have negative consequences for financial intermediation, aka the banking sector. Banks play an important role in deposit management and payments. Now, some FinTech payment platforms have emerged that only focus on one function of money: payments. Meanwhile, other financial services are organised around the payment function, including features such as credit, fund management, and insurance (good examples of this kind of platform are Alipay and WeChat Wallet). These FinTech payment platforms connect consumers (borrowers, debtors, investors, among others) together, rather than the banks, so that banks can be replaced. 83 CBDCs could have the same characteristic as these FinTech payment platforms because they also allow the general public easy access the central bank balance sheet. Therefore, some scholars worry that digital currency and digitalisation could cause an inversion of the currency financial intermediation system (Meaning et al., 2021). Although Brunnermeier and Landau (2022) argue that CBDCs would only have small negative effects on the financial intermediation system because of the low circulation volume, the real effects of CBDCs on the banks business model could only be proved with the development of CBDCs and would also vary depending on their liquidity. Third, CBDCs could pose risks to individual privacy (Tronnier, 2021). The original intention of the CBDC design tries to strike a balance between the 'controllable anonymity' and 'anti-money laundering' (Turrin, 2021). Therefore, CBDCs do not allow for anonymous transactions in the same way that cash can be spent anonymously (Lee et al., 2021c). Data privacy regulations could provide some protections, but these may be insufficient to eliminate public concerns over the risk of state surveillance (Borgonovo et al., 2021). Fourth, as a kind of digital currency, CBDCs could bring about environmental issues (Laboure et al., 2021). The production, deposit and transaction of CBDCs would likely consume a plethora of energy and emit a large amount of CO2, leaving carbon footprints and causing increased environmental pollution. Finally, CBDCs could trigger a new round of trade wars between China and the United States (Waller, 2021; Goldman, 2022). The Society for Worldwide Interbank Financial Telecommunications (SWIFT) system gives the United States a strong economic sanction capability. However, the digital renminbi supported by China's Cross-Border International Payments Systems (CIPS) can replace SWIFT and challenge the existing international payments system, which is dominated by the United Stated (Goldman, 2022). This potential threat could trigger U.S. sanctions on Chinese banks by pressuring their transaction nodes, leading to a renewed U.S.-China trade war. CBDCs' encouraging progress has generated extensive attention and discussions among academics and economists. The majority of available studies still concentrate on the fundamental qualitative analysis of CBDC and its technological innovations. Central bank digital currencies can provide a more accurate assessment of CBDC's potential. CBDCs have significant geographical constraints, as they are only valid in the issuing country. Central banks could become direct competitors of payment service providers, causing financial losses for banks. Moreover, new investment alternatives with CBDC could diminish customer demand for deposits. In turn, CBDCs can reduce bank lending to the overall economy and economic growth. 84 Crypto-based CBDCs have no ties to fiat money and may be subject to greater price volatility. The disadvantages of central bank digital currency also include increasing rivalry for commercial banks. As an alternative for bank deposits, CBDCs can encourage banks to improve their deposit rates. Then, it may result in a transition from deposit funding to wholesale funding. Digital currencies issued by central banks can also enhance the possibility of system-wide bank runs. Such bank runs may increase more rapidly in times of financial crisis, regardless of time or vicinity (Geroni, 2021). 85 References Allen, F., Gu, X. and Jagtiani, J. (2022). Fintech, Cryptocurrencies, and CBDC: Financial Structural Transformation in China. Yüklə 0,77 Mb. Dostları ilə paylaş:
|