While the central banks of some countries are hoping to be a part of the virtual currency revolution, the Bank for International Settlements (BIS) is concerned about the repercussions of going digital.

A cashless society is definitely the way of the future, a future that some governments and banks are trying to be a part of. Central bank digital currencies (CBDCs) may be an abomination of decentralized cryptocurrencies, but it is happening.

Sweden’s Riksbank is hoping to offer its e-Krona and the Bank of England has a cryptocurrency unit to help it along its virtual currency journey.

BIS Voices its Concerns

However, according to Business Insider UK, the Bank for International Settlements (BIS) has stated that these bank-issued virtual currencies could have dire consequences for the global financial system.

A report written by Klaus Löber, who is a Senior Advisor at the European Central Bank (ECB) and Aerdt Houben, who is the Director of the Financial Stability Division at De Nederlandsche Bank (DNB), details the negative impact it could have on the economy.

According to this report, these virtual currencies could become direct competition for traditional fiat, which could lead to an increase in interest rates.

The report states:

The introduction of a central bank digital currency (CBDC) would raise fundamental issues that go far beyond payment systems and monetary policy transmission and implementation. A general purpose CBDC could give rise to higher instability of commercial bank deposit funding. Even if designed primarily with payment purposes in mind, in periods of stress a flight towards the central bank may occur on a fast and large scale, challenging commercial banks and the central bank to manage such situations. Introducing a central bank digital currency could result in a wider presence of central banks in financial systems.

The report went on to say that as a result, there could be a “greater role for central banks in allocating economic resources, which could entail overall economic losses should such entities be less efficient than the private sector in allocating resources.”

The report added that it might not only be the economic sector that could face repercussions:

It could move central banks into uncharted territory and could also lead to greater political interference.

The Dangers of Bitcoin, According To BIS

The Dangers of Bitcoin, According To BIS

This is not the first time that the BIS has spread FUD about critiqued cryptocurrencies. Its General Manager, Agustin Carstens, previously stated that they are a “threat to financial stability” and that Bitcoin, in particular, is “a combination of a bubble, a Ponzi scheme and an environmental disaster.”

Jacqueline Loh, who is the chair of the BIS markets committee, added:

Any step towards a possible launch of a CBDC should be subject to careful and thorough consideration.

Impact on Solvency

The head of Germany’s Bundesbank, Jens Weidmann has also been vocal on the implications of CBDCs. On a positive note, he had previously said:

“Allowing the public to hold claims on the central bank might make their liquid assets safer, because a central bank cannot become insolvent.”

However, he added that in times of economic uncertainty, citizens would most likely convert their fiat into the country’s official digital currency, which is great for the public but not for the banks. This easy conversion could make bank runs occur more frequently, which could then negatively impact the bank’s solvency.

Do you think that the views expressed in the BIS report will affect the popularity of CBDCs? Let us know in the comments below!

Images courtesy of Christian Hartmann/Reuters, Pixabay, Twitter

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