Various countries have started mulling over the idea of state-owned cryptocurrency to combat security related issues like money laundering and terror funding. However, not all the time the idea gets implemented immediately.
Some of the governments are currently testing the feasibility of using a CBDC, while South Korea has indicated a clear denial for the utilization of CBDC in the nation. CBDCs are basically state-backed or government-backed digital currencies. It is generated using a blockchain-based version of a country’s fiat currency. In South Korea’s case, the central bank has warned against the concept of central bank digital currency (CBDC). It believes that the use of CBDC will not just result in a lack of liquidity but also will cause an increase in interest rates.
The Central Bank at South Korea has been analyzing the prospects of CBDC since last May. Concluding its study over the crypto asset, the bank notified that it won’t issue any CBDC. The bank explained in its report suggesting that enabling CBDC in use will replace demand deposits held by local commercial banks. This is due to people’s perception of CBDC as a ‘far safer’ option. Due to the liquidity shortage, the money supply will collapse dramatically. This scenario will generate a surge in market interest rates.
Kwon Oh-ik, one of the co-authors of the bank notes,
“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.”
In the report, the bank emphasizes the negative effect of CBDC saying that it would cause mass withdrawals of funds from private institutions, squeezing liquidity.
Although, apart from South Korea, an Indian governmental panel also hinted to similar concerns regarding the impact of digital assets on the Rupee. With that, the Bank of International Settlements (BIS) based in Basel, Switzerland also concluded in their report that approx 70% of central banks in the world are involved in some form of CBDC research.