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- Recently, the Federal Reserve Bank of Philadelphia’s Research Analysts introduced a paper. That details the effect of CBDC (Central Bank Digital Currency) on our financial system.
- Further, it reflects that a CBDC is equivalent to demand deposits at the commercial bank.
- Moreover, the central bank does not possess the authority to make longer-term loans.
Recently, the Federal Reserve Bank of Philadelphia’s Research Analysts introduced a paper. It details the effect of CBDC (Central Bank Digital Currency) on our financial system. The report underlines the role of commercial banks in taking short term deposits but lending longer term.
Further, it reflects that a CBDC is equivalent to demand deposits at the commercial bank. But, with the support of the government.
As per a report, the bank stated that after launching CBDC, the central bank would become a deposit monopolist. That means pulling all deposits from the commercial banking sector.
Thus, the CBDC ought to decrease the risk presented by the ventures of commercial banks. Also, render our financial framework more secure. Additionally, the paper addresses that if competition from commercial banks reduced, the central bank needs to take additional consideration. To abstain from disrupting maturity transformation.
Moreover, the central bank does not possess the authority to make longer-term loans. Therefore, the research says despite making loan decision by itself, increase the possibility of employing investment banks to do bulk lending on their behalf.
The financial advocates welcome the development of CBDC
Interestingly, the paper’s authors quoted some historical examples of central banks where the banks are extending loans to individual and small projects. Such as, the Bank of England was engaged in commercial activities. Through taking 1600s deposits and lending from mortgages.
Besides this, the financial advocates welcome the development of CBDC. The CEO of cryptocurrency firm Metal, Marshall Hayner, stated that he does not found that CBDCs risk private banks.
Hayner further added, to replace traditional fiat currencies, the central bank must issue retail CBDCs.
Furthermore, a spokesperson from IMF official notified that CBDCs must apply as a private-public association. He illustrated that private banks should work upon innovation, client management, and interface design. Whereas, the central bank should concentrate on financial stability and guidelines.
