A digital currency could allow citizens to have accounts at the central bank. A study by the Philadelphia FED contradicts the position of many central banks regarding CBDCs.

The Philadelphia Federal Reserve recently released a report, warning that the introduction of a central bank digital currency (CBDC) would represent a fundamental change for the financial system. They also said that it would lead central banks to perform functions typical of commercial banking.

The study “Central Bank Digital Currency: Central Banks for everyone?”  notes that the Philadelphia FED recognizes cryptocurrencies based on the Bitcoin and Ethereum networks as the starting point for emerging CBDC proposals. The document also mentions Facebook’s Libra project as another motivating factor for these initiatives.

Features of CBDCs

Among the features of CBDCs, the publication highlights that they can support more flexible payment systems, avoid the risks of money creation, facilitate competition, efficiency, and innovation in payments, as well as improve the availability and usability of the funds of the central bank.

These features would enable central banks with a greater capacity to compete with commercial banks, according to the report. A country’s central bank could become “a deposit monopolist, attracting deposits from the commercial banking sector.”

The authors of that report argue that central banks are not investment experts. However, they state that these institutions could rely on banks specialized in that field.

Definition of CBDC and Its Types

This study introduces a differentiation between CBDCs and synthetic CBDCs. On the one hand, there are “account-based CBDCs that can be implemented through accounts that customers can keep directly at the central bank.” On the other hand, the authors define synthetic CBDCs as “those provided to the public through special designated accounts, in supervised commercial banks.” They say that these institutions will retain the corresponding amount of funds in segregated reserve accounts at the central bank.

One of the main fears that savers have is that of bank runs. The authors state that central banks already have the role of preventing a bank run, through contracts with banks. They also make provisions to avoid the massive withdrawal of deposits from commercial banks in panic situations. According to the study, this allows concluding that a central bank is more stable than commercial banks.

The report concludes that the monopolization of public deposits by a central bank would be eliminating “the forces that lead the central bank to supply the right amount of transformation to maturity.” The term “transformation to maturity”, widely used in the study, is a parameter that marks the evolution of a bank in terms of its financial intermediation capacity.

This study contradicts the opinions of experts and central banks, who explore CBDC opportunities and blockchain-based systems to make the financial system and interbank operations more flexible. The Central Bank of France recently announced that it wants to experiment with the integration of digital currencies. It also requested to receive proposals for applications with this type of currencies.

By Willmen Blanco


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