March 29, 2024

Philadelphia Fed: “Central Bank cryptocurrencies can crowd out commercial banks”

According to researchers at the Federal Reserve Bank of Philadelphia, government-owned cryptocurrencies couldchange the role of commercial banks and push them out of the financial system.

The Philadelphia Fed published a research paper.the document “Central Bank Digital Currency: Central Banking for All?”, which outlined conclusions about the consequences of using state-owned cryptocurrencies. The researchers focused on the potential competition of the Central Bank cryptocurrency with the traditional role of commercial banks in transforming short-term deposits into longer-term loans.

“The launch of a state cryptocurrency canpromote a fundamental shift in the architecture of the financial system, and initiate the birth of the concept of a central bank "open to all", — the document says.

The study was conducted by the Fed in conjunction withUniversity of Pennsylvania and the University of Chicago. Researchers have studied the consequences of issuing cryptocurrencies of the Central Bank and how this can affect financial intermediation. In particular, the role that state-owned cryptocurrencies play in “giving consumers the opportunity to have a bank account directly with a central bank,” and how this will affect the operation of commercial banks, was examined.

Under the transformation of short-term deposits intolonger-term loans refers to the practice of financial institutions borrowing money for shorter periods than they lend. This is often done using deposits from savers by converting this funding into long-term loans such as mortgages. The role of commercial banks is to meet the needs of lenders and borrowers.

This process can be unpleasant.for example, in case of panic in the markets or panic withdrawal of bank deposits, when all depositors try to withdraw money immediately, or when money markets suddenly run dry due to the fact that lenders no longer provide each other with short-term loans.

The document states that the set of appropriations,obtained through private financial intermediation (commercial banks) can also be obtained using state cryptocurrency, provided that competition with commercial banks is allowed, and depositors do not panic. However, the document identifies related issues.

“If competition from commercial banksworsens, for example, due to some fiscal subsidization of central bank deposits, the central bank must act carefully to avoid chaos in transforming short-term deposits into longer-term loans,” — the document says.

In other words, if a state-owned cryptocurrency really changes the role of commercial banks, then there are concerns that central banks might harm money markets.

The paper also notes that “rigiditycentral bank contract with investment banks ”holds back panic. Thus, if depositors start making deposits exclusively with the central bank, it can ultimately become a monopolist, taking deposits from the commercial banking sector.

In February of this year, a member of the board of governors of the US Federal Reserve (FRS), Lael Brainard, said that the institution had become more sympathetic to the idea of ​​​​issuing a digital currency by the Central Bank.

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