Agustin Carstens, the general manager of the Bank for International Settlements (BIS) has once again taken the time to warn against the dangers of issuing a central bank digital currency (CBDC)
He made this known in a speech he made at the Central Bank of Ireland. There, Carstens noted that as of now, the value of venturing into an unknown and uncertain territory regarding the issuing of central bank digital currency (CBDC), has not been seen by central banks. He continued that such action by a central bank will bring about fundamental changes to both the monetary system and financial stability.
Two Tiers of Monetary System
Explaining further, he stated that the current monetary system consists of two tiers – the customer-facing banking system and the central bank. These two tiers work hand in hand. Once a CBDC gets introduced, the lending and deposit business would have to shift from commercial banks to central banks. This will then result in a one-tier system
Carstens also stated that:
“There are historical instances of one-tier systems where the central bank did everything. In the socialist economies before the fall of the Berlin Wall, the central bank was also the commercial bank. But I do not think we can hold up that system as something that will serve customers better.”
The BIS chief continued that:
“At times of financial stress, money tends to move away from banks that are seen as high risk towards banks that are considered more secure. Therefore, it is not far-fetched to picture a scenario in which a CBDC could command a premium over fiat currency. For example: where one euro of deposits in the commercial bank buys less than one euro’s worth of central bank digital currency, ”
A CBDC would also affect the monetary policy environment, significantly and it will also “change the demand for base money and its composition in unpredictable ways.”
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