Central Banks vs Commercial Banks: Final Battle

Central Bank Digital Currencies (CBDCs) will eliminate the need for commercial banks in dispensing money into society. The monetary policy transmission mechanism can be direct from central banks to individuals and companies, without the need for banks.

With a CBDC, central bankers have almost unlimited powers on Monetary Policy. They don’t need the monetary policy to go via commercial banks. Its death to commercial banking. Every economic unit will have a direct account at the central bank. There is no anonymity. Every individual and company is known, registered, and verified in order to access a wallet. They can see every transaction on the blockchain, they can literally see velocity in real-time.

The central planners can demonetize old currency, and you cannot buy or sell without a CBDC wallet. The central bankers can have a perfect barometer of purchases in real-time. They achieve a perfect understanding of the economy, in economics parlance, they have perfect information.

Central bankers can switch to behavioral incentive-based monetary policy. Monetary Policy becomes the ultimate economic control tool. More than that, it could actually become the ultimate control tool.

Currently, Commercial Banks have direct access to society by taking in deposits, extending loans, and providing money transfer and account holding services. These intermediary activities justify their existence. If the intermediary and aggregation roles are taken away, then commercial banks are not needed. They are toast.

Given that a fight or flight mode is activated, commercial banks could choose to fight by actively sabotaging the central banking system via adopting bitcoin and choose to flight by becoming DeFi platforms.

If commercial banks chose to migrate their balance sheets to privately-issued currencies and decentralized currencies such as Bitcoin, they will present a challenge for central banks with regards to how they (central banks) can introduce their own digital currencies when the old currency is destroyed without their involvement.

Any attempt to launch a CBDC has to be done with the collaboration of commercial banks where old fiat is exchanged for CBDCs. The sequence is of the essence. CBDCs have to be launched before the majority of transactions are migrated to bitcoin and alt-coins.

If commercial banks, sensing that their extinction event is nigh, choose to put up a resistance against betrayal by central banks, then central banks could be checkmated at their own game.

This is the final Armageddon between father and son, or between mother and daughter. Battle lines have been drawn. Only one can survive. Trying to save both will result in both dying.

Bitcoin tries to eliminate both in the long run. In the short run, a hybrid money and banking structure will probably exist.

Let’s state a couple of points that are beyond any reasonable doubt:

1. The future of money is on the blockchain
2. Crypto-currencies are here to stay
3. Decentralized finance is here to stay
4. Central banks need to fight crypto-currencies by issuing their own, simple bans will not work.

Central banks are in a tight corner, they can either save the commercial banking sector or save their own existence by issuing new digital currency that fits the modern age of technology.

• Saving the commercial banking sector means not creating their own cryptocurrencies, thus leaving themselves open to extinction as Bitcoin gradually eats the role of central banks. The faster bitcoin grows, the quicker the demise of central banking
• Saving their own existence by jumping onto the bandwagon of the evolution of money means they have to dump commercial banks (i.e. lose some weight, drop the garbage)

If central banks try to issue digital coins without removing the protections that commercial banks have from external competition, the digital coins will fail dismally. The minimum viable product would be that which reduces transaction fees and allows for mass access, and these call for reduced involvement of commercial banks.

A very successful CBDC is essentially a run on commercial banks. Citizens could withdraw their balances from commercial banks and load them onto the new digital currency because of the low transaction fees, zero account holding charges, etc.

Commercial Banks are not stupid. They know what's coming. They are aware that cryptocurrencies are out to replace them. They initially played down Bitcoin as a joke but are now fully aware that this is the beginning of the end for them. They hate Bitcoin.

Banks' survival has always been hinged around the protection they get from central banks. You cannot just work up and start a bank like how you start a spaza shop. Banks are licensed and de-licensed by the central bank. The central bank only issues a certain number of licenses that they deem fit for their economy so that the economy is neither overbanked nor underbanked. Banks' profitability has been underwritten by central banks. If a bank fails, central banks can rescue it or rescue the depositors, etc. If all banks are in a mess, the central bank just prints a couple of millions, or maybe billions, even trillions to address that little bother. Bitcoin changes that.

Bitcoin allows for decentralized banking. Virtually anyone who can gather around enough electricity and processing power can be a banker and get to enjoy the transaction fees. You don't need permission from anyone.

The same permission-less system goes for customers. You can send money to anyone, anywhere without requiring permission from anyone.

Because Bitcoin is a permission-less system, it circumvents the central bank. Banking and money transfers can be done without the permission of a central bank or a commercial bank. This kills the ability of the central banks to protect their little babies.

Commercial banks, being aware of the situation are thinking of several options to adapt and justify their existence:

1. they could issue their own crypto-currencies - everyone is doing it, they lose the huge profits from protected banking and get a little bit of money from seigniorage.
2. they could adopt Bitcoin themselves and quickly transform themselves into decentralized finance platforms. They forego the huge protected banking profits for small platform fees associated with DeFi. It's akin to trading-in the past for the future. This move is highly unlikely given the immense control and profits they currently have.
3. they could lobby for the central bank to put outright bans on Bitcoin and alt-coins, thus buying themselves some time. They can run and hide from the coming cryptocurrency storm for a while, though the end-game is extinction.

It's all game theory from here. The stance adopted by commercial banks depends on the stance adopted by central banks. Some central banks have signaled the move towards their own digital coins. In response, some commercial banks have started cozying up to Bitcoin, hinting that they could offer custodial services as well as integrating their payment rails with bitcoin.

This is a tug of war. If central banks pull the CBDC way, commercial banks will pull the Bitcoin way.

Ciao!