FX.co ★ BIS: Banks see risk in CBDC

Problems on the US stock market are increasingly fueling rumors about the safe harbor that central banks may offer during financial crises. This refers to national digital currencies, about which representatives of various financial institutions have been talking a lot lately.

We are talking about those countries that are more or less doing well with their economies. The Federal Reserve, the Bank of England, the European Central Bank, and the Swiss National Bank may soon release their proposals for introducing digital currencies in their countries.

The Bank for International Settlements reported that during a crisis, a central bank digital currency (CBDC) "could be perceived as a safe haven". The fact that in times of crisis many households prefer to keep their funds in a jar and withdraw deposits from bank accounts has long worried central banks. With the introduction of CBDC, you can try to reduce transaction costs, which very seriously affect the stability of the banking and financial systems in crisis. It is not for nothing that central banks begin to pump liquidity, which helps commercial banks to cope with the consequences of the crisis.

Another argument for central banks to introduce their digital tokens is the relatively high volatility of the cryptocurrency market, which has long been called an alternative to inflation-stricken fiat currencies. The ability to conduct instant international transactions with minimal losses on commissions and with little or no regulation is also quite an attractive argument. China is already in the final stages of testing its digital yuan, which is prompting other countries to follow suit.

In addition, the report also shows how CBDCs may affect the corporate banking sector and its giants. There are several negative factors for banks. With the introduction of CBDCs, they could seriously lose some commercial and private deposits, jeopardizing the industry. "Government-backed digital currencies could lead to higher volatility in deposits and/or a significant, long-term reduction in customer deposits," according to the report. "This could, under certain circumstances, affect bank profitability, lending, and the overall provision of financial services."

Both of the risks could be managed by forcing tight controls on the CBDCs. Tight limits on transactions or holdings of the digital currencies could mitigate such dangers, as could a lengthy transition period before launching the new assets. Commercial banks will not stand aside and wait for their business to crash. They will most likely develop their class of digital tokens, which will be able to partially recoup their losses but that is only a distant prospect.

Wall Street and the crypto sector are eagerly awaiting a Fed research paper in the coming days. The draft is expected to be sent out for general discussion before the central bank takes action and announces the adoption of a digital dollar. The Fed recently contributed to the BIS study, suggesting that the issues they outlined could add to the expected report.

As for the technical picture of bitcoin, while trading continues in a narrow range, the bulls have a strong interest in cryptocurrency. The bulls have already managed to take the middle of the $42,700 channel and now the price is consolidating above this range, which will allow counting on the renewal of the upper border of the side channel located at $44,990. A breakout of that level will certainly lead to a larger upward correction to the area of highs at $47,900 and $50,800. If the bears regain the volumes of the market and set short positions below $42,730, most likely we will see an immediate test of $40,600 support, below which the bulls may start to have real problems. The risk of the breakout of this level is slightly weakened, but till the BTC will not break above the MA200, it will be wrong to speak about the bullish sentiment in the market.