In a 32-page document entitled “Central Bank Digital Currency”, the Federal Reserve Bank of Philadelphia examined the future of the monetary system in connection with digital central bank currencies (CBDCs). The Federal Reserve Bank of Philadelphia concludes in the paper that the introduction of digital currencies could lead to a fundamental change in the architecture of the financial system.

Federal Reserve Bank of Philadelphia sees central banks as deposit monopolists

The institution sees a risk that so-called “deposit monopolists” could emerge. Among other things, the study has examined the effects that may arise if consumers terminate their current accounts with standard banks and instead hold digital currencies from central banks in the future.

Digital currencies of central banks (CBDC’s) are expected to function like normal coins or banknotes, but completely digital. They are expected to be cheaper and more efficient by going all digital, which should put pressure on the dominance of the traditional FIAT infrastructure. There is a risk that the commercial banks will be deprived of their deposits and thus their entire business model. If large parts of the population start to keep their money with the country’s central bank, the Fed and other central banks could end up becoming a deposit monopoly.

USA under pressure from digital yuan

Theoretical discussions about digital currencies issued by central banks have been going on for quite some time and were eventually inspired by block chain technology and crypto currencies like Bitcoin. Recently, the Fed has been looking more closely at a digital dollar. In February, Chairman Jerome Powell said that the focus is on feasibility. The intensification has been triggered by significant competitive pressure, fuelled by China’s efforts to introduce a national digital currency and by private companies such as Facebook’s Libra project. The fear that the US dollar could lose its status as a world reserve currency is a driving force behind the additional emphasis on the issue.

China is about to launch the digital version of the yuan, which could create serious problems for the US banking system and force the US to digitize the dollar as well. This could also become a campaign issue for Donald Trump, now that the trade war with China is flaring up again. The Financial Times reported last month with the headline “Possibly heading for a world after the dollar“, referring to China’s digital currency regime. Donald Trump, who last year announced that the dollar is and always will be the world’s most dominant currency, is under pressure.

In China, the first tests with a digital yuan have been underway in four cities since the end of April. Other countries such as Norway, Sweden and Japan are also working on digitizing their national currencies.

BIS study shows great interest of central banks in CBDCs

According to a survey by the BIS (Bank for International Settlements), 80% of central banks indicated that they were actively involved in the design of a CBDC. However, 40% of the banks have already skipped the theoretical research of CBDCs and are now in an experimental phase.

*Originally published in German at CVJ.ch