Earlier today South Korea central bank researchers published results of a study they have been conducting, and their conclusion is not that positive to the existing financial institutions. They warn that issuing of a central bank digital currency (CBDC) will hurt the country’s economy.
A central bank digital currency (CBDC) is a bad idea for central banks
The rise of decentralised virtual currencies has instilled fear on existing financial institutions as they promise to make them obsolete. This has inspired these institutions to invest some time and effort into researching how they can survive in the changing world.
One way out for these financial institutions has been issuing a central bank digital currency (CBDC). But before doing that central banks need to understand what ramifications such a move could have and this is what South Korea did.
Their researchers have concluded that issuing a central bank digital currency (CBDC) could affect the liquidity at central banks.
According to the study, if the public is to access the CBDCs, the central bank demand reserves and deposits could be reduced, and this could leave them with a cash shortfall. This would, in turn, force them to cover up by raising the interest rates on the loans they give out.
An excerpt of the report states:
“This has negative effects on financial stability, which increases the likelihood of bank panic in which commercial banks are short of cash reserves to pay out to depositors.”
Kwon Oh-Ik, a reporter with CoinDesk Korea, seems to agree with the above statement. He adds that if the central bank digital currency is to be issued, “supplementary measures should be taken so that they do not adversely affect financial stability.”
Last June the Bank of Korea noted that issuing a central bank digital currency (CBDC) could pose a “moral hazard.” Adding that the move could seriously affect the monetary policy and
What’s your take on the warning issued by these researchers regarding the issuing of a central bank digital currency (CBDC)? Share your thoughts in the comment section below.