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.
