Federal Reserve Bank Report on CBDCs: Central Banks May Become Deposit Monopolist, Sorry Commercial Banks

The US Federal Reserve Bank of Philadelphia has published a paper on Central Bank Digital Currencies or CBDCs. This is a hot sector of digital assets as CBDCs have the potential to supplant paper currency at some point in the future. Yet many questions remain regarding the systemic impact of a CBDC.

According to the Fed paper entitled Central Bank Digital Currency: Central Banking for All?, central banks may end up being “deposit monopolists” something that would certainly impact the operations of traditional commercial banks that have built their entire business on the deposit/lending model.

The authors of the report are; Jesus Fernandez-Villaverde, University of Pennsylvania, Daniel Sanches, Federal Reserve Bank of Philadelphia, Linda Schilling – Ecole Polytechnique, Harald Uhlig – University of Chicago.

The report states besides the removal of physical cash, a CBDC will enable central banks to engage in “large-scale intermediation by competing with private financial intermediaries for deposits.” Individuals, as well as businesses, may hold their cash, or deposits, directly with a central bank. This could result in a “fundamental shift in the architecture of a financial system.” Central banks could end up “creating havoc.” A central bank may be viewed as “run-proof” and thus a better option versus commercial banks.

The discussion surrounding CBDCs is fascinating and this paper is an interesting read. Many assumptions must be made in any model – especially without an established regulatory environment. In the end, the first step may be an improvement to the existing payment rails – one that is in need of some technologically polish.

The paper is embedded below.



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