Central-Bank Digital Currencies May Undermine Commercial Banks, Bank of Korea Says

Cryptocurrencies issued by central banks, known as Central Bank Digital Currencies (CBDCs) can potentially have a negative impact on the South Korean financial system by undermining commercial banks, according to a recent report.

The report, published by the Bank of Korea (BOK), South Korea’s central bank, notes that the introduction of a CBDC could cause a liquidity shortage and push up interest rates in the country. This, as people would withdra their funds from commercial banks to get their funds in a central bank-backed currency, believing it’s “far safer.”

As a result, the report claims commercial banks would fall into a liquidity shortage as the money supply started dropping. Subsequently, interest rates would rise. Kwon Oh-ik, one of the report’s authors, stated:

The CBDC 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 by banks. When people pull out their money, banks raise rates, or lower the reserve ratio, to secure more funds.

The report comes as various central banks throughout the world look into the possibility of issuing their own CBDCs. As covered, a survey revealed top Chinese economists are divided on whether the country should have a CBDC. Nouriel Roubini, one of the most well-known critics of blockchain tech and cryptocurrencies who teaches economics at New York University (NYU), has stated CBDCs will “destroy” bitcoin and other cryptos.

As Yonhap points out, a CBDC is designed to work as a hard currency in terms of being a medium of exchange and store of value. While cryptocurrencies could be used for the same purposes, a currency backed by a central bank has the public’s confidence.

Last month, Yonhap adds, the Bank of Korea revealed it doesn’t plan on issuing a cryptocurrency in the near future, after conducting a study on it. It said, however, it’ll further look into the advantages of disadvantages of lau