OMC Markets Update
Central Bank of Philadelphia has warned that the new CBDC that has gained massive attention all over the globe might be a disaster to commercial banks which may lead to the closing down of the said banks. The research contained in the paper that was titled “Central Bank Digital Currency: Central Banking for All?”, talked about the effect that the new central bank-backed digital currency would have on the banking system. With the Central Bank Digital Currency and stablecoins generating massive waves across the globe, analysts have noted that the launch might bring about dire consequences for physical cash.
CBDC possess negatives and positives
The feds say one of the most important reasons for the development of the CBDC is that they “represent an important innovation in money and banking history.” Even with the positives generating massive applause all over the world, they pointed out that the negatives should be out into consideration soon enough. “The introduction of digital currencies may justify a fundamental shift in the architecture of a financial system, a central bank ‘open to all’,” the 32-page paper noted. “We consider a framework in which the CBDC takes the form of demand deposit accounts of the public at the central bank,” the fed said.
CBDC will cause monetary system crisis
One of the main objectives of the central backed digital currency is that every individual will be able to open and maintain an account with the central bank. The research stated that the influx of clients to the central banks’ database would cause an eventual crash to the system because of massive deposits and withdrawals. “While the central bank is capable of offering the socially optimal deposit contract, just as commercial banks do, we demonstrate that the rigidity of the central bank’s contract with the investment banks leads to different allocations during banking panics,” the research stated.
“This implies that the central bank’s indirect investment in the long asset is protected from early liquidation by this, either completely deterring runs on the central bank or making central bank runs less likely than runs on the commercial banking sector,” the paper further stated.
Former Bank of England Governor noted that making the CBDC available on fiat would cause grievous harm to the system not minding the central banks’ involvement. Meanwhile, China has already fast-tracked its process of launching its CBDC after trials of the digital Yuan have been ongoing across different cities. The United States is now hoping to look to the digital dollar to keep the dollar in control.
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