Fitch Ratings: Azerbaijan may choose a two-tier model for digital currency – EXCLUSIVE

When launching a digital currency, the Central Bank of Azerbaijan (CBA) will likely adopt a two-tier model, Maksim Maliutin, associate director, EMEA Bank Ratings at Fitch Ratings, told Report.

"Under this scheme, the issuance of the central bank digital currency (CBDC) will remain with the regulator, while distribution functions and direct service to end-users will be delegated to commercial banks," Maliutin said.

The expert noted that banking institutions will most likely need to invest in IT integration, enhanced cybersecurity, and adaptation of operational processes to connect to the CBA platform, as well as to meet updated compliance requirements and conduct settlements.

"A key threat to the banking sector could be the substitution of the deposit base if clients start moving part of their funds from bank accounts into CBDC. This could weaken sustainable funding and liquidity reserves of credit institutions, and increase their dependence on more costly sources of financing," Maliutin emphasized.

According to the analyst, the magnitude of this risk largely depends on the architecture of the CBDC: whether interest will be paid on balances, what limits will be set on ownership and conversion volumes, and how easily transfers between bank deposits and digital currency can be executed, especially during periods of financial instability.

"In addition to risks, CBDC can increase the efficiency of payment operations, accelerate settlements, and provide greater transaction transparency, reducing cash-handling costs and opening opportunities for developing new digital products. At the same time, the positive effect for banks will most likely grow gradually and will be partly offset by initial capital investments," Maliutin said.