In line a recent report published by Oxford Business Law ‘web-blog‘, the idea of issuing CBDCs [Central Bank Digital currency] is just too tempting to ignore, a postdoctoral researcher from the University of Luxembourg found in his study.
A renowned postdoctoral researcher ‘Hossein Nabilou,’ from the the University of Luxembourg, revealed his findings in a very study entitled “Central Bank Digital Currencies: Preliminary Legal Observations.” The report outlined potential challenges that launching CBDCs that may cause for the ECB [European Central Bank].
In line with Nabilou, cryptocurrencies have considerably impacted the banking sector. He added how their practicality, similar to fiat currency issued by a financial organisation, 1st drew banks’ attention. Banks were conjointly preoccupied with the thought that cryptocurrencies may ruin their monopoly on managing the circulation of cash and influencing the steadiness of existing monetary systems, Nabilou explained.
Thus, CBDCs are often be treated as a policy response to the growing popularity of cryptocurrencies, he added. Despite the prevailing doubtfulness towards crypto and several failed tries to launch a state-backed coin, like the Venezuelan Petro, central banks are actively ‘learning‘ the technology behind digital currencies. A number of them even have the possibility of launching a CBDC in their agenda, the researcher added.
However, if the ECB launches a digital currency, it might lead to banking disintermediation, Nabilou explained. Customers can get direct access to the central bank’s balance sheets, and consequently there’ll be no reason for them to carry balances under a commercial bank, that could lead to overall banking sector instability.
Moreover, such a move would centralise the credit allocation and undermine the principle of an open economic market system with free competition, violating the constitutional constraints set by the EU. For those reasons, the ECB is unlikely to issue CBDCs unless the acceptable regulations are introduced, Nabilou concluded.
Venezuela was one amongst the primary countries to launch a state-backed coin, earlier in 2018. Despite the efforts taken by the govt., the Petro has seemingly failed to help bail out the country’s economy. Many banks in Iran have conjointly ‘supported‘ a gold-backed digital currency named PayMon, whereas Egypt on the other hand remains considering a ‘possibility‘ of launching CBDCs.
Several central bank official’s have publically shared Nabilou’s views on CBDCs. Alike, South Korea’s central bank has recently ‘issued‘ a warning over CBDCs, stating that they’d end in mass withdrawals of funds from personal institutions, compressing liquidity and pushing up interest rates.