US Fed warns of commercial bank collapse due to CBDCs

US Fed warns of commercial bank collapse due to CBDCs
Written by:
Ali Raza
June 5, 2020
  • The US Fed recently published the results of its research into the impact of CBDCs.
  • Research suggests that CBDCs have positives, but that they are heavily outweighed by the negatives.
  • In the worst-case scenario, CBDCs would cause a bank run, which would lead to the banking system collapse.

The potential impact of Central Bank Digital Currencies (CBDCs) has been a major topic ever since China announced the testing of its own digital yuan. In fear of China gaining too much influence in the financial world thanks to its advanced views, many other central banks started developing their own CBDCs.

Meanwhile, many others started at least researching CBDCs, their potential use, but also their impact on modern banking as we know it. Among them was the Federal Reserve of Philadephia, which recently issued the results of its research — as well as a warning.

Are you looking for fast-news, hot-tips and market analysis? Sign-up for the Invezz newsletter, today.

What did the Fed discover?

According to the warning, Fed suspects that the CBDC movement might have a massive impact on the banking system. In fact, it might even lead to a total collapse of commercial banks.

The research, called ‘Central Bank Digital Currency: Central Banking for All?’ focused on the impact of account-based CBDCs.

While China was a large factor in making other central banks researching CBDCs, even China itself was launched into action by fear of Facebook’s Libra. Naturally, Libra was also the driving force that caused the Fed to start its research.

The positives and the negatives

The Fed did point out the possible advantages that CBDCs could bring. It even recognizes them as an ‘important innovation in money and banking history.’ However, it also looked into the negative sides, stating that “The introduction of digital currencies may justify a fundamental shift in the architecture of a financial system, a central bank ‘open to all. We consider a framework in which the CBDC takes the form of demand deposit accounts of the public at the central bank.

What this means is that people will be able to maintain a direct account with central banks. But, the research also pointed out that the project such as this can strongly backfire. The Fed predicts that it will ignite sudden withdrawals of bank deposits, as people begin to abandon the banks. As a result, the entire banking system could and would collapse.

A similar warning was seen before when the former governor of the Bank of England raised such concerns. Despite his warnings, however, the Bank of England is, in fact, involved in CBDC research.