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- The Central Bank Digital Currency (CBDC) concept is divided into two distinct ideas, the first is the prohibition of physical cash, and the second is allowing retail customers to direct deposit with the central bank.
- The modern economics main initiator is the credit cycle.
- According to the former chief economist Kenneth Rogoff, the criminal practices of cash are also the main reason for objection to paper bills.
The Central Bank Digital Currency (CBDC) concept is divided into two distinct ideas, the first is the prohibition of physical cash, and the second is allowing retail customers to direct deposit with the central bank.
This sums up that the two policies balance each other. They have very different economic significances. The first idea increases credit expansion, whereas the second idea causes contraction.
Due to the deflationary nature of electronic deposits that are allowed to the public to hold at their accounts, the financial regulators will permit these CBDC schemes to succeed is doubtful.
Over the past few years, Central Bank Digital Currency (CBDC) was popular in the financial market. In certain dominion, the physical currency is quite uncommon. This could be attained without making any substantial changes to the existing electronic money frame.
The modern economics main initiator is the credit cycle
Before analyzing the efficacy of this proposal, let us talk about the global financial system. The modern economics main initiator is the credit cycle. Banks expand their balance sheets by raising new loans, which in turn creates assets (the loan) and liabilities as (the corresponding deposits).
From a liquidity point of view, the largest deposit-taking institutions in an economy have a voluntary competency to create new loans. Thus, the funds borrowed out will automatically be replaced into their own bank as a deposit.
Therefore, it is necessary to analyze the two categories of CBDC structure, as of banning cash and permitting the retail customers the potential to deposit directly at their central bank.
The banning of physical cash impacts the bank balance sheets expand
The banning of physical cash policy expands the balance sheets of the commercial banks which causes inflation on the economy. On the other hand, the policy which says central bank deposit account can be made directly available to the general public causes the bank balance sheets to contract to make deflation on the economy.
Moreover, the most important part of the discussion in favor of banning cash is the usage of cash by the criminal to create a criminal offense. According to the US government records, around 25% of US cash was in $100 bills, while currently, it is 80%. The reason is that higher denomination bills are more popular among criminals.
According to the former chief economist Kenneth Rogoff, the criminal practices of cash are also the main reason for objection to paper bills. One can use uncut diamonds, gold coins, and Cryptocurrencies but cannot scale them the same way. This is because these things are not easy to spend in the economy.
Interest in CBDC
However, CBDC has some partial success in small and well-off jurisdictions, the motivation to protect the commercial banks from runs will ultimately compensate all other considerations.
Over the past year, Bitcoin and perhaps stablecoins such as Tether found to be partly responsible for the increased interest rate in the CBDC idea. The Bank of International Settlements, the Bank of England, Sweden’s Risbank and the European central bank have played with the idea.
Thus, it is unlikely to say that CBDC will develop in any expressive way in a significant jurisdiction.
