A central bank-issued digital currency (CBDC) could fuel faster bank runs during periods of financial stability, the Bank of International Settlements (BIS) said Monday.
The institution - considered by some to be the "central banks' central bank" - argued those looking to develop and launch a wholly digital currency should "carefully weigh" the implications of doing so, especially as they relate to monetary policy and overall stability. In sum, the BIS noted that a currency of that nature "might be useful for payments but more work is needed to assess the full potential."
"A general purpose CBDC could give rise to higher instability of commercial bank deposit funding. Even if designed primarily with payment purposes in mind, in periods of stress a flight towards the central bank may occur on a fast and large scale, challenging commercial banks and the central bank to manage such situations," the BIS stated at the outset.
Later on, the report's authors revisited the subject, outlining a hypothetical situation in which banks - even stronger ones - could face issues during a bank run in an environment in which a central bank's digital currency offers a path for deposit flight.
The report explains:
"Depending on the context, the shift in deposits could be large in times of stress. A crucial element in such system-wide shifts is the stronger sensitivity of depositors to the actions of others. The more other depositors run from weaker banks, the greater the incentive to run oneself. If CBDC were available, the incentives to run could be sharper and more pervasive than today, as the CBDC would be the favoured destination, especially if deposits were not insured in the first place or deposit insurance was (made more) limited. Whereas weaker banks could experience a run, even stronger banks could face withdrawals in the presence of CBDC."
"It would be difficult to stem runs under such conditions, even when providing large lender of last resort facilities," the report adds.
The BIS has taken a somewhat middle-of-the-road view toward distributed ledger applications, expressing a belief through past reports that the technology is promising yet is unlikely to be used widely by banking institutions in the near-term. By contrast, its senior leaders have sharply criticized cryptocurrencies in the past.
Whether such concerns forestall any central bank-issued currency of this kind remains to be seen. As it stands, a number of institutions have looked at the idea of using some cryptocurrency elements as part of their digital money projects. Last week, Yao Qian, who heads up the People's Bank of China's research in this area, argued that some characteristics should be incorporated.
Piggy bank image via Shutterstock
The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.
Central BankBISBank of International Settlements
Quebec Pushes Hydropower Utility to Halt New Bitcoin Mines
The Canadian province of Quebec has temporarily put a halt to the development of new cryptocurrency mining operations.
The region - known for its cheap hydropower - has been an attractive destinati
Steve Seagal-Backed 'Bitcoiin' ICO Hit with Regulator Warning
The Securities Division of the Tennessee Department of Commerce and Insurance (TDCI) is warning residents about the Steven Seagal-backed "Bitcoiin" project.
Citing New Jersey's cease-and-desist ord
Ireland's Finance Department Plans Blockchain Working Group
Ireland's Department of Finance has proposed the creation of a new blockchain working group to help create cohesive regulation across government agencies.
Revealed in a new report, titled "Virtual
'Fake News': Russian Official Reportedly Denies Involvement with Petro
The Russian government is pushing back against reports that it helped Venezuela launch its controversial "petro" cryptocurrency.
In public remarks Friday, the deputy director of the Information and
US Government Watchdog: Regulations Are Hobbling DLT Innovation
The complexity of U.S. financial regulations is holding back distributed ledger technology (DLT) startups, the U.S. Government Accountability Office (GAO) says.
The GAO's finding, in a report publi
IRS Reminds US Taxpayers to Report Crypto Earnings
The Internal Revenue Service has reminded U.S. taxpayers to include any cryptocurrency income on their annual tax forms.
In a release published Friday, the IRS noted that cryptocurrency transaction
Smart Contracts Now Recognized Under Tennessee Law
The governor of Tennessee has signed a bill that legally recognizes blockchain data under state law.
Governor Bill Haslam signed the measure on Thursday, public records show, capping a months-long
Nevada digs bitcoin, DC loves Obama: Most popular purchases in every state, according to app Earny
Ever wonder what residents in your neighbor states are shopping for? The most popular purchases by state, it turns out, vary greatly. Earny, an app that gets you money back on things you buy based