The emergence of Central Bank Digital Currencies (CBDCs) raises a perplexing question: will CBDCs trigger bank runs and economic collapse rather than usher in a glorious digital revolution?

The allure of digital currency

CBDCs, issued and controlled by central banks, exist solely in the digital realm. They promise numerous advantages: faster transactions, lower costs, and potentially a way to bypass intermediaries. They also imply seamless cross-border payments, instant access to government aid, and a financial system lubricated by the smooth gears of digital efficiency.

Will banks face runs?

In fact, the banking crisis in the United States in 2023 was a stark reminder of the fragility of public trust. The collapse of Silicon Valley Bank sparked panic among depositors, who rushed to other institutions, highlighting how quickly confidence can vanish in the face of uncertainty. CBDCs, with their potential to erode trust in banks, could exacerbate this situation.

What about the scale of digital currency?

A key consideration is interest rates. If the return on CBDCs significantly exceeds that of bank deposits, large-scale withdrawals from banks become more likely. Conversely, unattractive CBDC rates may keep people within the familiar realm of traditional banking.

Another key factor is accessibility. Should everyone have unrestricted access to CBDCs, or should there be limitations, perhaps based on transaction volume or account balance? Striking the right balance here is crucial. Open access may fuel bank runs, while overly restrictive measures could stifle the innovation promised by CBDCs.

The future of digital finance

There is no doubt that the traditional banking model is on the brink of significant transformation. Whether CBDCs become the catalyst for this change or merely another footnote in the ongoing story of money remains to be seen. But what is certain is that the future of finance will become increasingly digitized.