Central Bank Digital Currency and the Future of Commercial Banking

Posted: 18 Mar 2020

Date Written: February 22, 2020

Abstract

Digitalization and Blockchain have fundamentally transformed the structure of the monetary system. The first wave of cryptocurrencies such as Bitcoin, Ethereum or Ripple have failed to gain relevance in terms of their share in monetary transactions. This was due to systemic deficiencies leading to extreme volatility, limited capacity and limited transparency, which have reduced their ability to fulfil the basic functions of money and hence their attractiveness as a medium of exchange. More recently, stable coins have entered the scene which were specifically designed to deal with the issue of volatility by tying the digital currency to an underlying set of assets. Hence the outlook for digital currencies has improved significantly. Although, the widespread of stable coins have has not been significant, the announcement of Facebook Libra and Telegram Gram with the huge number of billions of users raises the probability that this project will successfully reach global scale in a relatively short period of time. This means that a fully stable currency is made available to the people of developing countries, where governments are generally unable to manage the stability of their local currencies, which can lead to a digital dollarization. Meanwhile, the discussion around the introduction of central bank digital currencies (CBDC) as a possible response has continued more intensively. Introduction of a digital currency issued by the central bank will lead to a direct competition for bank deposits between Central Bank and Commercial banks which eventually lead banking system toward full reserve structure.

Keywords: Digital Currency, Cryptocurrency, Commercial Banking, Central Banking, Blockchain

JEL Classification: E40، E44، E50، E52، E58

Suggested Citation

Asadi, Peyman, Central Bank Digital Currency and the Future of Commercial Banking (February 22, 2020). Available at SSRN: https://ssrn.com/abstract=3542664

Peyman Asadi (Contact Author)

University of Mazandaran ( email )

Babolsar
Iran

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