KIEL Sees the Potential of Central Bank Digital Currency To Bring Stability

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by Bhushan Akolkar · 3 min read
KIEL Sees the Potential of Central Bank Digital Currency To Bring Stability

The report goes to mention that unlike cryptocurrencies, CBDC’s could ensure financial stability and be used for exchange instead of just mere speculation.

There has been a long going debate in the global financial industry regarding the future of virtual digital currencies and how they could affect and shape the growth in the global economy ahead. As on date, financial experts from around the globe remain divided on the idea of cryptocurrencies. While on the one hand, a few economists believe that cryptocurrencies could boost the global trade due to instant cross-border payments, other believe that the absence of regulatory check could propel them to be used for all the wrong reasons.

According to the latest report published by economic researchers from the KIEL Institute of World Economy, the issuance of digital currencies by a central bank would prove to be more beneficial for a healthy and stable financial system. The report at the same time denounces the idea of cryptocurrencies i.e. the decentralized digital currencies.

In this report, which was published on Tuesday, June 26, the KIEL researchers have differently classified virtual currencies from cryptocurrencies like Bitcoin, Ethereum and others. The report goes to state that cryptocurrencies are not an appropriate alternative to Central Bank Digital Currency (CBDC). It mentions:

“Currently, cryptocurrencies such as Bitcoin could not supplant traditional currencies to any significant degree. The available technology faces severe limitations regarding scalability. In particular, it would be prohibitively expensive to conduct even a moderate share of the transactions now handled via traditional currencies through cryptocurrencies.”

The report is said to be presented to the  “Monetary Dialogue” in the ECON Committee of the European Parliament and will serve as a guide. It further goes to criticize cryptocurrencies saying that they have merely emerged as a medium of financial speculation instead of being a medium of exchange for goods and services. The report also states that cryptocurrencies cannot be valued rationally as they were not based on a fixed value. The extreme volatility shown by cryptocurrencies have, in turn, attracted more speculators and the lack of regulations is proving to be a catalyst to this effect.

The report further goes to mention that digital currencies can provide a huge opportunity to the central banks even if they might cause “disruption” in the traditional banking system. It says:

“To avoid recurrent instability of the banking system, commercial banks would need to come up with more reliable funding sources than deposits. As the fractional reserve character of the  current banking system can be a major source of instability, such a disruptive change is not necessarily a bad development, but could finally pave the way for a more stable financial system.”

Many centralized banking institutions around the globe have already started working on having their own Central Bank Digital Currency (CBDC). The governor of England has already hinted that he is open to the idea of having a CBDC. The Bank of Thailand and the Central Bank of Bahamas are already experimenting with this concept.

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Bhushan Akolkar

Bhushan is a FinTech enthusiast and holds a good flair in understanding financial markets. His interest in economics and finance draw his attention towards the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In free time he reads thriller fictions novels and sometimes explore his culinary skills.

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