Although the US Federal Reserve lags far behind China and other countries in digital currency and CBDCs, it has begun to take rapid steps to catch up. This review, published by the FED and discussing the central bank digital currency according to the literature, shows the pros and cons of the CBDC idea through the eyes of FED economists Francesca Carapella and Jean Flemming.
In the published report, the effects of the central bank digital currency on commercial banks, fiscal policy and financial stability are discussed. When looking at the definition in the literature, it is stated that CBDC is a payment instrument with an interest yield and it is not necessarily required to be kept in a bank account or commercial bank.
Possible effects of CBDC
Experts emphasize that commercial banks will be the first to be affected after CBDCs enter the sector. It is emphasized that commercial banks will have to increase their deposit rates after such a change and this will increase the funding cost of banks. This may pave the way for a significant increase in loan rates. In the FED report, it is stated that, with the domino effect, it may cause banks to change the main funding source first and then to lose the intermediary role of banks. Subsequently, banks’ loan and lending rates may decline sharply.
But St. As long as commercial banks can borrow reserves from the central bank, their intermediation function may not disappear, and banks can still lend even with CBDCs, according to Louis FED executive David Andolfatto.
CBDC could benefit the central bank
In line with these explanations, it can be stated that CBDC does not have negative effects on commercial banks. In addition, it is stated that central bank digital currencies can prevent the phenomenon known as “bank congestion”. Bank accumulation can be defined as the bankruptcy, technically, when everybody withdraws their funds and money from the banks in a great economic depression or crisis. FED economists emphasize that in such a case, the central bank can prevent bank clutter by setting certain limits on the digital currency.
So a possible CBDC can be quite beneficial for financial stability and central banks, according to preliminary research. However, the FED continues to take things slowly on the Digital Dollar issue and it seems to be. The Bank of Canada also recently published a study on why CBDC is risky.