- A clutch of the foremost central banks, including the U.S. Federal Reserve, Bank of England, European Central Bank and Swiss National Bank are warning of potential systemic stability risks from a CBDC.
- The central banks also warned that CBDCs had the potential to undermine the commercial banking system, taking a major bite out of commercial deposits and jeopardize the industry’s access to funding sources.
As cryptocurrencies have entered the consciousness, central bankers globally, who had been initially dismissive of the phenomenon, have been quick to embrace their very own digital currencies.
And while China has been the first to issue its own central bank digital currency (CBDC), a clutch of the foremost central banks, including the U.S. Federal Reserve, Bank of England, European Central Bank and Swiss National Bank are warning of potential systemic stability risks from a CBDC.
But to understand what that risk is, it’s first necessary to understand how money is created.
In most modern financial systems, the citizenry don’t have a direct relationship with the central bank.
Instead, governments issue debt, that commercial banks buy and then sell to the central bank, which in return creates money to pay to the commercial banks, the bulk of which go back to the government for spending, and a fraction of which goes to fund mortgages, credit cards, student loans and the gamut of other financial services.
But because people have a relationship with their commercial bank, in the event that there should be times of financial stress, a CBDC could “be perceived as a safe haven” according to the report published Thursday by the Bank for International Settlements.
“Evidence from previous systemic bank runs indicate how powerful the impetus of a bank run is, and therefore how the reduced transaction costs of a CBDC could exacerbate bank runs.”
The central banks also warned that CBDCs had the potential to undermine the commercial banking system, taking a major bite out of commercial deposits and jeopardize the industry’s access to funding sources.
Nonetheless, the U.S. and other major economies are likely to press on with their CBDC initiatives, with U.S. Federal Reserve Chairman Jerome Powell noting at a news conference last week,
“The ultimate test will apply when assessing a central bank digital currency and other digital innovations. Are there clear and tangible benefits that outweigh any costs and risks?
