DMPQ-Explain the risks in adopting digital currencies issued by Central banks?

Critics note that the demand for private currencies comes primarily from people who have lost faith in fiat currencies issued by Central banks. They argue that governments across the world have been debasing their respective currencies by printing them in excessive amounts, thus forcing many to switch to private currencies whose supply is limited by design. So, the mere digital version of a national currency like the rupee or the U.S. dollar is unlikely to affect the demand for private currencies, they believe.

  • Many, including various central bankers, fear that people may begin withdrawing money from their bank accounts as digital currencies issued by Central banks become more popular. a. This concern was flagged by the RBI Deputy Governor as well. Remember that many people currently use bank accounts to safely store their cash.
  • When the digital wallet offered by the RBI can serve the same purpose, people could very well begin converting their bank deposits into digital cash.
  • One thing that could prevent any large flight of capital from bank accounts to digital currencies is the fact that bank accounts, unlike digital currencies, offer interest on deposits.
  • The withdrawal of bank deposits can also affect the amount of loans created by banks.
  • However, this could happen not simply because banks will have fewer cash deposits to lend to borrowers.
  • Contrary to popular belief, banks do not loan out actual cash deposits. Instead, they use cash deposits as a base on which they create a pyramid of electronic loans far in excess of the cash deposits.
  • So, banks hold lower amounts of cash in their vaults than what their depositors and borrowers could demand from them anyway.
  • The real reason banks will be able to create fewer loans is that when customers convert their bank money into CBDCs, banks will be forced to surrender at least some cash and will thus possess an even smaller base on which to create loans.
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