Could Central Bank Digital Currencies Destroy the Banking System
While inflation continues to dominate the headlines, developments below the economy’s surface are continuing, without much fanfare. One of the major developments that could completely upend the way the economy operates is the introduction of central bank digital currencies (CBDCs). CBDCs have only been on the scene for a few years, but they’re already showing signs that they could turn our money and banking system completely on its head.
The Federal Reserve and many other central banks around the world once looked askance at digital currencies and cryptocurrencies, preferring to disparage them as tools for money laundering and criminal activity. But once the utility of cryptocurrencies became apparent, and once it became clear that cryptocurrencies and digital currencies were here to stay, central banks began to see the threat to their monetary monopoly posed by these new entrants.
The Fed was one of the last central banks to start exploring the issue of a CBDC, and risks being overtaken by other central banks. The Fed was undoubtedly spurred by China’s introduction of the digital yuan, an ambitious attempt to introduce a CBDC in the world’s most populous country. And unless the Fed comes up with something quickly, it risks being left in the dust as more countries around the world develop CBDCs.
But CBDCs aren’t as benign as they might seem at first glance. They’re not just another method of digital payment, and they’re potentially something which could completely upend the banking system and destroy banking as we know it.
Obviates Need for Commercial Banks
Right now, central banks don’t issue currency directly to consumers. Banks and financial institutions place orders for currency with the Fed, which in turn orders physical currency from the Bureau of Engraving and Printing. Since commercial banks no longer issue their own currency, but only Federal Reserve Notes, they’re essentially acting as middlemen for the Fed.
The fact that commercial banks offer time and demand deposits is a residual vestige of the times when banks played a far more important role in the monetary system. But even those services may go by the wayside if a digital dollar is introduced.
With a CBDC, the central bank issues digital currency directly. And because everything is digital, there is no physical currency and consequently no physic
Article from LewRockwell