BIS Report: CBDCs Could Make Nationwide “Bank Runs” Easier

Countries are increasingly adopting digital iterations of fiat currencies (CBDCs and stablecoins) to address weaknesses in their financial systems. However, a report by the Bank for International Settlements (BIS) claims digital currencies are not necessary and may present problems for financial stability.

Specifically, the bank pointed out that CBDCs could spur a “digital run” in periods of systemic stress.

CBDCs Pose Threat To Developing Countries

In its recent report, the BIS examined the impacts of CBDCs and stablecoins on emerging markets and developing economies (EMDEs). The bank noted that many developing economies are launching CDBCs to improve their payment infrastructure. 

The BIS added that EMDEs view CBDCs as an effective tool for reducing costs, improving know-your-customer (KYC) and anti-money laundering (AML) obligations, and combating finance terrorism. However, the bank also highlighted that CBDCs also present policy challenges for these countries as they can prompt a digital bank run.

“CBDCs – and in particular retail CBDCs – present their own policy challenges for EMDE authorities. In particular, there is a risk that in periods of systemic stress, households and other agents may suddenly shift from bank deposits or other instruments into the CBDC, spurring a “digital run” of unprecedented speed and scale.”

A digital bank run scenario could occur if a large number of customers transferred their savings out of the private financial system and into a CBDC en masse. This form of a bank run is deemed more dangerous as it could feasibly happen very quickly and only requires a few mouse clicks from account holders.

On the other hand, a classic bank run is when a large number of users of a bank or a financial institution withdraw their deposits simultaneously over concerns that the bank might not have enough reserves. One of the more recent examples of this is the bank run of Northern Rock in 2007 — the first bank run the UK had seen in 150 years.

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BIS: Stablecoins Are Unnecessary and Insufficient

The BIS believes stablecoins also pose a threat to financial systems, particularly in developing economies. This should come as no surprise since almost all regulatory bodies from across the globe have adopted aggressive behavior towards stablecoins. 

For instance, China’s central bank (PBoC) warned that stablecoins pose serious risks to global financial systems back in July, when the country was clamping down on crypto mining. Officials from the US have also said stablecoins should be “quickly” regulated. Now, echoing the same point of view, the BIS said:

“Stablecoin arrangements aspire to improve financial inclusion and cross-border remittances – but they are neither necessary nor sufficient to meet these policy goals. They are not yet tested at scale, and it is unclear whether they would offer lasting competitive advantages over rapidly evolving digital payments services.”

In the report, the BIS questioned whether stablecoins could offer lasting advantages over rapidly developing digital payment services like digital ID, e-money, and mobile banking. The bank also noted some risks posed by stablecoins, with the most notable one being “risks to the integrity of the global financial system, including for AML/CFT.” 

More Countries Pushing For CBDCs

As covered by The Tokenist, the multinational investment bank, HSBC, believes CBDCs are a new form of money that can “spur economic growth.” The bank underscored that since CBDCs are stable and transparent, they don’t present risks to users.

“CBDCs could help to spur further economic growth by making payments and settlements more efficient and cheaper. They could also fuel innovation across the financial sector. The near instant nature of CBDC payments is likely to lower the cost of issuing and trading bonds and other securities.”

All of this describes why countries are increasingly interested in CBDCs. For instance, Nigeria, Africa’s largest economy, has recently unveiled its intentions to launch a government-backed digital currency, called eNaira.

Moreover, Mastercard aims to facilitate CBDC and stablecoin transactions on its network. Michael Miebach, CEO of Mastercard, said they would provide a “safe space for governments and private sector banks” to test out digital currencies.

Do you think developing countries should avoid CBDCs? Let us know in the comments below.