Earlier this month, the Federal Reserve published a paper that examined how central bank digital currencies (CBDCs), stablecoins and narrow non-banks could influence monetary policy.
In the report, author James A. Clouse admitted that “monetary policy implementation is no longer in Kansas” and examined in detail how the three aforementioned instruments can affect the economy and thus the Fed’s monetary policy.
The content is something for publishers, users and all interested parties to think about. In short, significant changes are underway.
CBDCs, stablecoins and narrow banks – what is their impact?
Interest-bearing CBDCs, stablecoins and narrow banks (defined as banks that do not engage in lending) can all affect commercial banks and reduce their deposits. In turn, banks will raise interest rates and reduce new lending, which will naturally affect the economy.
Clouse argues in his report that the Fed could lower the policy rate. However, it could reduce the impact of one of its most important tools when monetary stimulus is needed.
The higher the interest rates offered by stablecoins, CBDCs and narrow bank deposits become, the more deposits will flow away from commercial banks, and the higher their interest rates will go.
Of the three, the paper argued that the impact of narrow banks would be the greatest. These banks attract deposits by offering higher interest rates, but do not lend; thus they have the greatest economic impact. Given their lower overheads, it is difficult for retail/commercial banks to compete by offering higher interest rates.
Financial innovation will be disruptive in both good and bad ways
It is clear from the Fed report and others that those in power are well aware of the disruptive potential of CBDCs, stablecoins, blockchain technology, tokenization and other forms of financial innovation.
On top of this report, BlackRock CEO Larry Fink thinks we are heading towards tokenization as the Bank for International Settlements (BIS) conducts experiments in tokenization, quantum stable payment systems and in various other areas. This is not even scratching the surface: around the world, central banks, global governing bodies, national governments and mega-firms are preparing for the inevitable changes.
As with all innovations, such as the Internet and mobile wave, there will be winners and losers, and the upheaval process will be messy. It is entirely possible that, as commercial banks struggle to compete, some will go under. This can have huge and unpredictable economic consequences, as we saw during the 2008 financial crisis.
Having a bird’s eye view of the entire financial system will be incredibly useful in the future. Verifying the positions of commercial and narrow banks can help the Fed and others predict the next bank failures, spot the next deposit scams (eg Celsius Network), and take steps to mitigate the negative impact of all these to mitigate disruption.
To make this possible, the entire financial system must ironically embrace the ultimate disruptive technology: blockchain. Running the world’s financial system on a scalable public blockchain like BSV will allow us to gain the insights needed to better see what’s coming, how companies are dealing with it, and what consumers and users want and need In short, all the relevant data on a single immutable ledger will help policymakers connect the dots.
While the Fed’s report focuses on how it will affect monetary policy, it has enormous implications for the viability of national currencies, the velocity of money, economic growth, financial accessibility, and much more. A scalable public blockchain and a single set of ledgers can help us keep track of everything and make the necessary adjustments in a more orderly, less chaotic way.
To learn more about central bank digital currencies and some of the design decisions to consider when creating and launching them, read nChain’s CBDC Playbook.
See: Find ways to use CBDC beyond digital currencies
New to blockchain? Check out CoinGeek’s Blockchain for Beginners section, the ultimate resource guide for learning more about blockchain technology.
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