Technology
Digital currencies Could be used as a substitute for commercial banks – at a cost, however.
One day, central banks could replace digital currencies by commercial banks. But this comes with risks, the Federal Reserve of Philadelphia has launched new research.
The 32-page research document titled "Digital Currency Central Bank: Central Bank for All? '– investigated the implications of the digital currency (CBDC) account-based central bank with its potential competition with the role of commercial banks of traditional maturity transformation.
The paper published on June 1, reads: "The introduction of digital currencies can justify an essential change in the architecture of the financial system, a central bank that is 'open for all.'
The Fed 's research branch questioned the implications of the CBDC launch and the effects of the opening of central bank facilities on financial intermediation, which were taken up in collaboration with the Universities in Pennsylvania and Chicago.
In particular, the question aimed to explore the role of CBDCs in 'giving customers the chance to have a bank account directly with a central bank,' which is basically a replacement for the role that commercial banking companies currently play.
The increase in maturity applies to Financial Institutions' custom of borrowing capital over time. Often this can be achieved by deposits by savers, which can be converted into long-term loans such as mortgages. Commercial banks have a role to play in helping lenders and creditors meet their needs.
However, this mechanism can backfire, as if all savers decide to withdraw funds at the same time, or if the money markets unexpectedly collapse because borrowers no longer offer one another long-term loans.
The paper established that, if competitiveness with those commercial banks and depots is prevented, the number of appropriations achieved through private financial intermediaries (commercial banks) could also be achieved by the CBDC. The paper also, however, determined the related costs.
"We have a sinister counterpart in our equivalence. The central bank should be careful in choices to prevent havoc by transitioning to maturity, "the paper says. If competition from commercial banks is compromised (for example, by certain fiscal subsidies on deposits from central banks).
In other words, central banks could cause money markets a concern if CBDCs have disrupted the role of commercial banks and allowed more money than was loaned.
The article also showed how "the rigidity of the Central Bank contract with investment banks," which was broken by fear, ends up becoming a "deposit monopolist," and attracts deposit outside the commercial banking market, if depositors decide to deposit exclusively with the central bank.
"This monopoly power eliminates the forces that induce the central bank to transform its maturity socially in an optimal way," the Fed reports.
