Association report reveals the changing role of banks in the blockchain era
The German Banking Industry Committee recently released a proof-of-concept report proposing a new payment method called "Commercial Bank Money Token (CBMT)". Surprisingly, the report bluntly stated that this token would allow “enterprises to transfer funds directly from wallet to wallet without the need for intermediaries such as banks.” This seemingly contradictory initiative actually reflects the banking industry's self-adjustment in the face of the rise of blockchain technology, trying to stay relevant in an increasingly decentralized financial world.
Source: German Banking Industry Committee Advantages of Commercial Bank Money Token (CBMT)
The association, which represents more than 1,700 banks, reports that "traditional forms of money and payment systems have reached their limits." As peer-to-peer and machine-to-machine payment transactions grow, the role of bank intermediaries is becoming increasingly irrelevant and sometimes even a hindrance. To adapt to this change, banks are trialling an "account-based" system that mimics existing deposit models. This approach allows them to leverage the efficiency of blockchain while maintaining centralized control over access and maintaining their deposit-based funding model.
Image source: German Banking Industry Committee CBMT leverages the efficiency of blockchain while maintaining centralized control over access and maintaining its deposit-based funding model
Faced with decentralization challenges, banks seek new positioning
Interestingly, the wording of the report is quite similar to the views in the Bitcoin white paper, which proposed "peer-to-peer payments without going through financial institutions." However, unlike Bitcoin, which aims to completely bypass banks, this report emphasizes that banks must adopt blockchain technology while still maintaining control of the financial system.
In addition, the report also highlights that banks need to take action in order to maintain an advantage in the competition for central bank digital currencies (CBDC). The report warns that a "zero-restricted retail CBDC launch" could lead to a weakening of the intermediary role of banks, or even the exclusion of banks from the payment process. To combat this threat, the report recommends the adoption of tokenized bank deposits as the core of banks’ strategies.
In terms of digital identity, the report raises the identity management challenges faced in the digital world, such as poor user experience and data leakage. Traditionally, identity information has been independently managed by each service, but "Self-Sovereign Identity (SSI)" provides a possibility for the future, allowing individuals to control themselves without relying on centralized platforms such as banks. data. The EU's eIDAS 2.0 regulations now require the private sector, including banks, to accept these credentials.
However, as decentralized identity solutions grow, banks’ ability to control access through authentication may diminish, just as their role in the payments industry is shrinking. Reports suggest that banks are trying to maintain their core status by allowing bank-approved entities to make wallet-to-wallet payments while keeping funds within bank-controlled systems, in stark contrast to the idea of decentralized finance.
Image source: German Banking Industry Committee Transactions are made through wallet-to-wallet payments by bank-approved entities to maintain their core status while keeping funds within bank-controlled systems
The future of banking: remain centralized or embrace decentralization?
A plan promoted by German banks to tokenize bank deposits shows that banks are embracing blockchain technology in their own centralized way. By controlling authentication, they temporarily maintain control of access. However, with the global shift towards peer-to-peer payments and self-sovereign identities, it is questionable whether banks can continue to maintain this control. The report shows signs of change, but the centralized nature remains. Is this enough, or should banks give in and embrace a more decentralized future? This will be a key challenge facing the banking industry in the new technological era.
