BIS Says That Digital Currencies Issued By Central Bank May Fuel Bank Runs

A digital currency issued by a central bank CBDC may have the capacity to fuel faster bank runs when there is financial instability.

According to the Bank of International Settlements, digital currencies could have a more pronounced effect on bank runs than fiat money. The BIS argued that people who want to develop a wholly digital currency need to weigh the implications of such an action carefully.

The Argument

The argument is that the distribution of complete digital currencies would affect the overall stability and monetary policy in the nation. The nature of digital currencies makes it suitable for payments but if it’s full potential is to be realized, more work needs to be done.

The BIS stated:

“A CBDC for general purposes may increase the level of instability in commercial deposit funding. Even when it is designed for mainly for payment purposes, central and commercial banks may be challenged to take control of situations where there is a fast and large-scale flight towards the central bank.”

Later, the report authors revisited the subject and outlined a hypothetical situation where the ease of cryptocurrency fund transfer will cause bank runs even in the strongest banks.

According to the report:

“The deposit shits may be large when there is stress. This, of course, depends on the context. One crucial element, in this case, is the increased sensitivity of those interested in making deposits to how others act. As more depositors run from weak banks, others will feel the need to follow suit. CBDC will increase the incentive to run. Everyone will want to run to CBDC. Those without insured deposits will run even faster. In the presence of CBDC, weak banks may experience a run and stronger ones will be faced with withdrawals.

Stemming runs under such conditions will be challenging according to the BIS.

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