So, when we ask a question of how will digital currency affect banks? So, we can say that Digital currencies are likely to give central banks more insight into the movement of money in the economy. The widespread use of electronic payment systems may also aid authorities to crack down on money-laundering and terrorist-financing efforts. Or on the other hand, we can also say that the Banks are afraid because Cryptocurrency exchange is a non-banking transaction. and if the Cryptos gain favours it can disrupt the ability of banks to create money. If this disruption alarms the central banks, then they will do something about it.

1. Will digital currencies
break the banking
system?
Harsh Chitroda - Anurag Pandey - John McGuire

2. Overview
Central banks are likely to gain more insight
into the movement of money in the economy
as a result of digital currencies. The widespread
use of electronic payment systems may also
aid authorities in their efforts to combat money
laundering and terrorist financing.

3. Any currency, money, or money-like asset
that is primarily controlled, stored, or
exchanged on digital computer systems,
especially over the internet, is referred to
as digital currency.
What is digital
currency?

4. History of Digital Currency
1983
David Chaum
Digicash
Bankruptcy
1996
Use of E- gold
Gold & Silver
Reserve Inc.
(G&SR)
1998
Paypal launched
USD-denominated
service
2008
Existence of
Bitcoins

5. Sub-types of digital currency
Digital currency is designed to work as a medium of exchange. There are many different
types of cryptocurrency, but these eight are among some of the more well-known
currencies.
● Bitcoin (BTC)
● Litecoin (LTC)
● Ethereum (ETH)
● Bitcoin Cash
● Ethereum Classic
● Zcash (ZEC)
● Stellar Lumen (XLM)

6. Do we really need digital currencies?
● Technological revolution
● Covid - 19 pandemic
Advantages
● Digital currencies require lower fees
● Fraud protection
● Simpler international payments
Disadvantages
● The volatility of prices
● The lack of trust

7. CENTRAL BANK DIGITAL CURRENCIES (CBDC)
A central bank digital currency (CBDC) uses a blockchain-based token to represent the
digital form of a fiat currency of a particular nation (or region). A CBDC is centralized; it is
issued and regulated by the competent monetary authority of the country.

8. UNDERSTANDING CBDC
● DIGITAL EXTENSION
● REMOVAL OF CREDIT RISK
● TRANSFERABILITY
● BLOCKCHAIN BENEFITS

10. BENEFITS OF CBDC
● Efficient Monetary Policy
● Ease Of Distribution and Access
● Lower Transaction Costs
● Reduction In US Dollar Dependency

11. RISKS INVOLVED IN CBDC
● RISKS To Financial integrity
● RISKS To Financial Stability
● RISKS To Innovation

12. HOW CBDC CAN BREAK THE BANKING SYSTEM
It is not just in a crisis that CBDCs might compete with banks by democratising currency.
They would be attractive assets to hold in normal times, too, especially if, like today’s
central-bank money, they were a tool of monetary policy and therefore paid interest .
Thus, commercial banks might be drained of the deposits with which they today fund
their lending. Disintermediation of the banking system might make impossible the
financial magic that allows households to pair long-dated mortgage borrowing with
instantaneously redeemable deposits.

13. SOLUTIONS FOR BANKS
● Limiting the amount of CBDC allowed to hold
● Relying on banks to manage public holdings of CBDC
● Make Banks fund themselves with much more equity

14. Current state of CBDC
● Considered to be in the research and development stage
● 80% of Central Banks are in involved in the process of creating their own CBDC
● Central Bank of Brazil in the launch sequence of their payment network
○ Digital Real is expected to enter circulation in 2022
● China currently testing their pilot e-Yuan in select cities
○ Widespread circulation expected in 2022

16. Global Adoption

17. Quantifying the Effect on Commercial Banks
● Introduction of CBDC may replace banks’ main source of funding and
intermediation
● Interest rates impacting banks’ deposits and loans
● The likelihood of bank runs

18. Quantifying Monetary Policy / Financial Stability
● CBDC can serve as a new monetary policy tool
● Ledger system creating stronger policy
● Long-run cyclical effects for the macroeconomy
○ 1 for 1 government debt exchange
○ Decrease interest rates and distortionary taxes
○ Counter-cyclical issuance

19. Quantitative impact on GDP
The Macroeconomics of Central-Bank-Issued Digital Currencies
Bank of England, 2019
● This study provides the findings of CBDC issuance 1-1 against government debt to
the amount of 30% of GDP could permanently raise GDP no less than 3%.
○ Stemming directly from reduction of interest rates, distortionary taxes, and
transaction costs.
● Quantitative Easing
○ CBDC-funded asset purchasing
● Efficient transmission channel
● Real interest burden

20. Conclusion
The introduction of CBDC will drastically change macroeconomic policy and the
financial industry as a whole
● The effects on monetary policy and the private sector
● Market readiness
○ Evident demand
○ Evident supply
○ CBDC ecosystems
● “There is a great deal of work yet to be done” - Jerome Powell

21. References
Dettmer, Otto. Will Central-Bank Digital Currencies Break the Banking System? The Economist Newspaper, 5 Dec.
2020.
Segal, Stephanie, and Pearl Risburg. Central Bank Digital Currency, Design Choices, and Impacts on Currency
Internationalization. CSIS, 20 Mar. 2021.
Carapella, Francesca, and Jean Flemming. Central Bank Digital Currency: A Literature Review. Federal Reserve, 9
Nov. 2020.
Barrdear, John, and Michael Kumhof. “The Macroeconomics of Central-Bank- Issued Digital Currencies.” 4 Feb.
2019, doi:Bank of England.
Team, CLabs. “Influencing the Velocity of Central Bank Digital Currencies.” 14 May 2020, doi:Celo.org.

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