Should the Federal Reserve issue digital currencies? -Part 3

Si Gyeongmin

Nov 07, 2021

Another reason may be to improve payment efficiency. The electronic payment market is highly concentrated. For example, in the United States, the vast majority of credit card payments are made through a few major networks, which have developed complex pricing mechanisms for merchants and consumers. The United States also lags behind many developing countries in the adoption of mobile payment technology, partly because the United States has adopted bank card payment very early. CBDC can provide an alternative electronic payment method and potentially enhance the competitiveness of the payment market. It can also provide another electronic payment method for consumers who do not have a bank account, thereby increasing financial inclusion.

The central bank may also want to strengthen competition in the banking industry. Interest-bearing CBDC may prompt banks to increase deposit interest rates, thereby increasing the supply of deposit funds in the banking system. But if CBDC and bank deposits are not close substitutes, then this impact will be limited. In addition, if the CBDC interest rate is set too high, it may increase bank financing costs, thereby crowding out bank-based intermediaries. More research is needed to evaluate the impact of CBDC on the banking market.

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