The Philadelphia branch of the United States Federal Reserve has published a new report that warns about the potential effects of issuing central bank digital currencies (CBDCs). 

In the report, the Fed said that — after the introduction of a CBDC — the central bank would become “a deposit monopolist, attracting all deposits away from the commercial banking sector.” 

This monopolization could endanger maturity transformation, according to the Fed, which is the practice of financial institutions borrowing money on shorter time frames than they lend it out. 

The Federal Reserve also states that if competition from commercial banks is impaired, the central bank needs to take extra care to avoid disrupting maturity transformation.

The report also explains that central banks are not investment experts and currently rely on private investment banks to fund long-term projects. However, the study notes that the implementation of a CBDC should not prevent investment banks from investing:

“The central bank cannot invest in long-term projects itself, but instead has to rely on the expert knowledge of investment banks to do so. We have derived an equivalence result that shows that the set of allocations achieved with private financial intermediation will also be achieved with a CBDC, provided competition with commercial banks is allowed and depositors do not panic.”

Experts welcome the development of CBDCs

Marshall Hayner, the CEO and co-founder of cryptocurrency firm Metal, told Cointelegraph that he does not believe that CBDCs endanger private banks. 

Metal is building a digital banking platform that uses stablecoins, which Hayner believes are the precursors to CBDCs. He said that the introduction of such a currency is only a matter of time:

“I don’t believe CBDC endangers retail banks, I find it highly probable they [CBDC] will become an integral part of the US banking system, and part of the existing regulatory structure, as the [Office of the Comptroller of the Currency] recently called on public comments on the topic of updating its rules on digital activities.”

Hayner said that central banks should issue retail CBDCs to replace traditional fiat currencies, as he believes that “the efficiencies and improvements greatly outweigh the negatives.” He explained:

“As cash rapidly declines, the need for a digital alternative for the modern banks and fintech platforms has emerged. From fostering trust in monetary authorities, to creating competitive payment systems and enhancing money laundering enforcement, we are seeing the beginning of the global digital dollar.”

At the end of May, the Digital Dollar Project released its white paper. The 30-page document sheds light on the potential applications of a U.S. CBDC. The organization was founded by former leaders of the CFTC and professional services company Accenture.

Also at the end of May, an IMF official argued that CBDCs should be implemented as a private-public partnership. He explained that the private sector should concentrate on innovation, interface design and client management while the central bank focuses on regulation and financial stability.