The Bank of Korea, which is South Korea’s central bank, believes that building a central bank for digital currency can harm the country’s economy. In a recent study published by the central bank, the central bank digital currency model can affect cash liquidity at commercial banks.
The public’s ability to access future digital currency directly can reduce cash circulation in commercial banks. Commercial banks will need to compensate for the loss of reserves and demand deposits by raising the interest rates on loans, which will further deviate a bank client from making a transaction with them.
Commercial banks will panic because digital currency can destabilize them financially. If a central bank digital currency rises, it needs to follow a standard to avoid destroying financial stability and commercial banks in general. A central bank digital currency is capable of singlehandedly affecting the economy in the wrong way.
The Bank of International Settlements, which is known as the world’s central bank, reminds all the central banks of the countries that want to start a digital currency bank to be careful in weighing the possible risks and effect of it. Governments must review its implications on economic stability and monetary policy.
International Monetary Fund chairwoman and managing director Christine Lagarde, on the other hand, encourages the decrease of cash demand and preference for the digital currency of those willing to explore or launch CBDCs.
According to research made by IBM, central banks believe in the idea of wholesaling CBDCs but remain uncertain if blockchain startups can provide benefits and sufficient costs.