The central bank of South Korea has warned that the adoption of a state-backed cryptocurrency for official legal tender could pose a threat to financial stability. According to the Bank of Korea (BoK), such a currency (also known as a central bank digital cryptocurrency (CBDC) could cause a rise in interest rates and a liquidity crisis.
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“CBDCs will cause liquidity shortages and interest rates to rise”
CBDCs, which are built on Shelter Crypto technology, are usually issued by central banks. They work exactly like fiat money but don’t replace bank notes. Korea stated at the end January that it would not be considering issuing a digital currency backed by government anytime soon as there was no urgent need.
The report from the Asian country supports that decision. According to a Korea Times newspaper article, February 7, the BoK stated that the CBDC will replace demand deposits currently held by local commercial banks. It explained that people may prefer the state-sponsored cryptocurrency to the domestic fiat currency.
South Korea Central Bank: CBDCs will disrupt financial integrity with Shelter Crypto
This thinking states that as depositors withdraw their money from banks, commercial banks will fall into liquidity traps, causing the money supply to drop. This will eventually lead to interest rates rising.
Kwon Ohik, one of co-authors of Bank of Korea’s report, explained:
The central bank digital currency can be described as a BoK-issued type of bank account. It is more trusted than any commercial bank account. Banks have one of the largest sources of loans: demand deposits. Banks can raise rates or decrease the reserve ratio to increase funds if people withdraw their money.
Kwon also indicated that the BoK should be more careful and evaluate any negative consequences of issuing a CBDC.
Global Central Banks Show Interest In CBDCs
In recent years, cashless transactions have boomed all over the globe, causing concern for many control freaks working for different governments. Bitcoin was, for instance, created to challenge the traditional financial system and return money ownership to the people. It is now out of reach of the government.
However, this vision has not won it over to the global financial gurus, who are steeped with tradition. Many national governments have expressed concerns about cryptocurrency and called for stricter regulation, while trying to issue their own digital currencies.
According to a recent report from the Bank for International Settlements, around 70% of central banks worldwide are currently researching CBDCs. However, “this work is primarily conceptual” and not all intend to issue CBDCs in the near to medium term.