A Central Bank Digital Currency, or a CBDC is a centralised digital currency designed by a central bank in order to integrate blockchain technology within their current products and offerings. CBDCs are not cryptocurrency as such, however, they do share some similarities. It is important to note that whilst there are a number of CBDC models around, no central banks have rolled out a fully fledged CBDC, as of yet.
South Korea and the South Korean Central Bank are the most recent bank to hit the headlines for their engagement with CBDCs, according to recent reports, it seems that although many believed the South Koreans would be open to a CBDC, the central bank there are not, and have announced that they have scrapped their recent CBDC project.
According to Finance Magnates:
“South Korean central bank has issued a warning against the concept of central bank digital currency (CBDC) saying the move will cause liquidity shortage along with a surge in interest rates. The Bank of Korea (BoK), in its report, explained that the introduction of a CBDC will replace demand deposits held by local commercial banks as people think the central bank-backed CBDC is far safer. This will create a liquidity shortage in the banks and the money supply will fall drastically, resulting in the rise of market interest rates.”
This seems to come as a result of extensive research into the CBDC arena made by The Bank of Korea. In essence, they worry that the introduction of a CBDC would have a drastic effect on the sovereign currency of the country, causing a liquidity shortage that would, in turn, boost interest rates. This is a bad thing, especially for those living within South Korea.
Kwon Oh-ik, one of the authors of The Bank of Korea report has said:
“The CBDC is a kind of a BOK-issued bank account. People trust it more than one in a commercial bank. Demand deposits are one of the biggest sources of loans by banks. When people pull out their money, banks raise rates, or lower the reserve ratio, to secure more funds.”
Central Bank Digital Currencies may well become the norm in the future. Indeed, they are something we can all get quite excited about, CBDCs will eventually give people across the globe access to a ‘crypto’ based currency that is recognised by a central bank and thus is accompanied with an element of trust. Of course, we’d much rather the central banks just adopt Bitcoin, but until CBDCs are used to demonstrate the full potential of cryptocurrency, that seems quite unlikely.