Today the Bank of Korea (BOK)
published a report following its economic analysis of the impact of Central Bank Digital Currency (CBDC). The report concluded that the effect on financial stability could be negative under certain circumstances, but suggested alternatives.
The threat to financial stability is when the CBDC is an interest-bearing central bank account which competes with commercial banks. As a result, commercial banks have fewer deposits, so they will be able to lend less, which raises the nominal interest rate.
The net effect is there’s too little lending, so in order to try to increase the money supply, the central bank mandated reserve-deposit ratio would be lowered. Given banks have fewer reserves, there’s a higher risk of them running out of cash. This increases the probability of bank runs and negatively impacts financial stability.
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