The Federal Reserve of Philadelphia Says Central Bank Digital Currencies May Put Private Banks in Danger
Recently, the Federal Reserve Bank of Philadelphia issued an in-depth report on Central Bank Digital Currencies (CBDCs) where it highlighted the implications of CBDCs on our financial or banking system. The Federal Reserve Bank of Philadelphia has clearly warned in the report that the implications of Central Bank Digital Currencies (CBDCs) may put commercial banks in danger and may even result in the closure of the banks.
“Central Bank Digital Currency: Central Banking for All?”
The Federal Reserve Bank of Philadelphia explored in detail the potential implications of an account-based Central Bank Digital Currency (CBDC) and its effect on our banking system in a report entitled “Central Bank Digital Currency: Central Banking for All?” According to this report of Fed, CBDC has the capability to replace private banks.
In the report, the Fed called CBDCs a great innovation in the history of money and banking and said that there are, no doubt, certain advantages of CBDCs. But the Fed also said that we cannot ignore the negative effect that it may have on the traditional finance system after its issuance.
The Fed Paper reads:
“The introduction of digital currencies may justify a fundamental shift in the architecture of a financial system, a central bank ‘open to all’. We consider a framework in which the CBDC takes the form of demand deposit accounts of the public at the central bank.”
The Fed then talks about the maturity transformation in the report. According to the Fed, when a CBDC will be issued, the central bank will be like “a deposit monopolist, attracting all deposits away from the commercial banking sector.” And this monopolization might result in the disruption of maturity transformation. The term maturity transformation means the practice of financial institutions to borrow money on a short time frame and after that, they lend it out.
Furthermore, the report states that the set of allocations that a central bank achieves with the help of commercial banks can also be achieved with a Central Bank Digital Currency (CBDC) as well.
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