South Korea’s Central Bank has raised concerns over Central Bank Digital Currency (CBDC), according to the report published by Bank of Korea (BOK) on February 07.
The report was prepared by the Korean Economic researchers which illustrated how a CBDC issuance might affect the liquidity at commercial banks.
CBDC deposits would radically lower the supply of private credit by commercial banks. As a consequence, the banks will likely increase their interest rates and it will further lead to a decline in their reserve-deposit ratio.
The report while referring to the CBDC states that “This has negative effects on financial stability by increasing the likelihood of bank panic in which commercial banks are short of cash reserves to pay out to depositors.”
Kwon Oh-ik, an economist and one of the co-authors of the Bank of Korea report, stated:
“The central bank digital currency is a kind of a BoK-issued bank account. People trust it more than one in a commercial bank. Demand deposits are one of the biggest sources of loans for banks. When people pull out their money, banks raise rates, or lower the reserve ratio, to secure more funds.”
Kwon further indicated that the BoK, which conducted and completed long-term research on cryptocurrencies, should be more careful and analyze any negative outcomes that could arise from the issuance of a CBDC.
At @sgfintechfest today, I told the audience that I believe we should consider the possibility to issue digital currency. With appropriate design, there may be a role for the state to actually supply money to the digital economy. #fintech https://t.co/QryTTCflRs pic.twitter.com/LPp6p0kILY
— Christine Lagarde (@Lagarde) November 14, 2018
The Bank of International Settlements (BIS), alerted that if any country’s central bank is seeking to develop and launch a CBDC, it must “carefully weigh” implications of doing so, particularly as they relate to monetary policy and overall financial security.
In October 2018, IBM’s research report observed that most polled central banks considered issuing CBDCs. However, they were still dubious if blockchain could provide with efficiency benefits.
Will the Korean Central Bank issue CBDC with more plannings in the future? Share your thoughts on the comments below?