State-Issued Digital Currencies Can Squeeze Banks, Says South Korea Central Bank

South Korea’s central bank issued a warning over central bank digital currencies (CBDCs) a week after saying it would not introduce one itself. The development was reported in local news outlet Yonhap News Agency, Feb. 7.

CBDCs, which are also known variously as state-backed or government-backed digital currencies, involve a blockchain-based version of a country’s fiat currency either replacing or circulating in tandem with paper notes and coins.

A number of governments are currently examining the feasibility of using a CBDC, while South Korea formally decided against the measure in late January.

The decision came as a result of a six-month consultation process from Bank of Korea (BoK).

Now, the central bank has claimed in a report that a CBDC would result in mass withdrawals of funds from private institutions, squeezing liquidity and pushing up interest rates.

“The CBDC is a kind of a BOK-issued bank account. People trust it more than one in a commercial bank,” Kwon Oh-ik, one of the authors of the report explained to Yonhap, adding:

“Demand deposits are one of the biggest sources of loans by banks. When people pull out their money, banks raise rates, or lower the reserve ratio, to secure more funds.”

Seoul has opted not to make significant changes to its stance on cryptocurrency as a whole in recent weeks. Last month, lawmakers similarly ruled out a U-turn over their ban on initial coin offerings in the country.

According to a report from the Bank of International Settlements — an organization based in Switzerland made up of 60 of the world’s central banks — last month, around 70 percent of central banks worldwide are conducting some form of CBDC research as of this year.