The South Korean Central Bank has issued a warning against the concept of central bank digital currency (CBDC) saying the move will cause a liquidity shortage along with a surge in interest rates, according to a Yonhap report.
Many central banks around the world are exploring the feasibility of launching the state-issued digital currencies based on the blockchain technology which can be circulated along with the fiats.
Last month, the South Korean central bank officially issued a notification mentioning that it will not issue a CBDC after having studied the prospect since last May.
The Bank of Korea (BoK) explained in its report that the introduction of a CBDC will replace demand deposits held by local commercial banks as people think the central bank-backed CBDC is far safer. This will create a liquidity shortage in the banks and the money supply will fall drastically, resulting in the rise of market interest rates.
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“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,” Kwon Oh-ik, one of the co-authors of the BoK’s report, told the local news portal.
CBDC vs. Fiat
A similar concern with CBDC was echoed in a report by the Basel-based the Bank of International Settlements (BIS). The report revealed that around 70 percent of the central banks in the world are carrying out some form of CBDC research.
As recently reported by Finance Magnates, an Indian governmental panel appointed to study the impact of cryptocurrencies is now concerned with the impact of digital assets on the valuation of the rupee, the country’s fiat currency.
Last month, South Korean regulatory authority also announced that the country would continue its ban on initial coin offerings (ICO) as many blockchain firms are breaking the laws to issue tokens.