The Bank of Korea: "CBDC Issuance Will Take Considerable Time... Concerns Over Reduced Monetary Policy Impact"

CBDC Issuance Requires Significant Time
Social Consensus Needed

[Asia Economy Reporter Jang Sehee] An analysis has emerged suggesting that once central bank-issued digital currencies (CBDCs) are fully introduced, the transmission effect of monetary policy may weaken and risks within the financial system could increase. It is also expected that a considerable amount of time will be required from the introduction of CBDCs to their actual issuance.

On the 24th, the Bank of Korea stated in its publication "Global Discussion Trends on Key Issues of Central Bank Digital Currency" that "If CBDCs replace bank deposits, it could impact various sectors." CBDCs are digital forms of currency issued by central banks by providing accounts to the general public.

First, it pointed out that the banks' fund intermediation function could weaken. With the introduction of CBDCs, market shares of debit cards such as check cards, credit cards, internet banking, and simple remittance services?which are typically based on deposit services?could be eroded. People may transfer funds to the central bank issuing the CBDC to use these services.

In particular, if a certain interest is paid on CBDCs or if there is a strong preference for safe assets, the scale of funds flowing out of bank deposits could increase further.

If deposits, which serve as important resources for handling loans and other services, significantly decrease, banks are expected to increase the proportion of market-based funding such as issuing long-term bonds to raise funds.

This could lead to side effects such as rising loan interest rates, resulting in a reduction in loans and investments themselves, and the disappearance of small banks with limited access to financial markets, accelerating the consolidation of the banking industry.

The report also mentioned that a decrease in bank deposits could ultimately threaten the effectiveness of monetary policy. As the amount of information available for credit provision decisions?such as customers' financial status and transaction history?dramatically decreases due to the reduction in bank deposits, banks may face constraints in credit supply, leading to a decline in the effectiveness of monetary policy.

Finally, the report added, "Major central banks maintain the position that CBDCs will replace physical cash rather than bank deposits," and "they are studying institutional measures to minimize the negative impacts on financial stability."