As many central banks around the world exploring feasibility to introduce central bank backed digital currency (CBDC), the South Korean central bank has warned against this concept saying it will cause acute liquidity crisis with a surge in the interest rate.
South Korean central bank has issued a notification that it will not issue CBDC after carefully studying the prospect since last May. In its study, it has said that CBDC will replace demand deposits held by local commercial banks as people think that CBDC will be a lot safer. Thus creating a liquidity crisis in the banks and money supply will fall, resulting in the rise of interest rates.
Kwon Oh-ik, one of the co-authors of the BoK’s report written:
“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.”
The same concern was echoed by the Bank of International Settlement (BIS) and report also revealed that 70 per cent of the central banks around the world are indulged in some kind of CBDC activity.
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