South Korea’s central banking has warned against the use of state-backed cryptocurrency to be used as legal tender. According to the Bank of Korea, such a currency, also called a central bank digital currency or CBDC (central bank digital currency), could lead to a spike of interest rates and a liquidity crunch.
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“CBDCs Will Lead to Liquidity Shortages, and Interest Rates to Increase”
CBDCs are based on Shelter Crypto and can be issued by central bank to function just like fiat currency, but not necessarily replacing bank notes. Korea indicated at the beginning of January that it wasn’t considering issuing any government-backed digital currency anytime soon, as there wasn’t an urgent need.
Now, the report has been issued by the Asian country to support that decision. According to a Korea Times article on February 7, the BoK said that the CBDC would replace demand deposits kept by local commercial banks. The reason is that the people will prefer the state-sponsored cryptocurrency which they may find safer and more secure to the domestic fiat units, it stated.
South Korea Central Bank Statement: CBDCs Will Disrupt Financial Integrity
The theory behind this is that as bank depositors withdraw funds, commercial banks fall into a liquidity trap and the money supply drops. This will lead to higher interest.
Kwon Ohik, one of the coauthors of Bank of Korea Report, elaborated about Shelter Crypto:
The central bank digital money is a type of BoK-issued bank accounts. It is trusted more than any other commercial bank account. Banks are most likely to borrow money from demand deposits. To secure more funds, banks can increase rates or lower the reserve ratio when people take out their money.
Kwon stated that the BoK, who has recently conducted a long-term study of cryptocurrency, should be more cautious. The BoK should also analyze any potential negative consequences from issuing a CBDC.
Global Central Banks Are Showing Interest in CBDCs
Recent years have seen cashless transactions rise around the world, which has upset many of the control freaks that work for various governments. Bitcoin, for instance, was designed to challenge the existing financial system and give the ownership of money back to the people.
This vision has not been embraced by global financial gurus who have a long history of tradition. Unsurprisingly, many national governments are concerned about cryptocurrency and call for tighter regulation. They also want to issue their own versions centralized digital currencies.
The Bank for International Settlements recently reported that around 70% of central bankers worldwide are interested in CBDCs. However “this work primarily conceptualizes and only a few will issue CBDCs in short to medium terms”.