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Bank of Korea: CBDC Could Threaten Commercial Bank Stability

CBDC Could Threaten Financial Stability of Commercial Banks, Says Bank of Korea

The Bank of Korea (BOK) has said that the introduction of a state-owned and issued digital currency in the form of central bank digital currency (CBDC) in South Korea could possibly zero-out commercial banks, reports Yonhap News Agency.

According to the source, the BOK published a report expressing concerns with low deposits demands into commercial banks that may result from the implementation of a state-backed CBDC into the financial system.

Kwon Oh-ik, one of the co-authors of the report, wrote: “The CBDC is a kind of a BOK-issued bank account. People trust it more than one in a commercial bank”. This implied that as customers are likely to trust the blockchain-based currency type backed by the BOK as opposed to the legacy form of money transfer and handling, this might lead to low liquidity in such commercial banks as customers withdraw their money. This would invariably shoot up interest rates.

Commercial banks are largely dependent on the loan infrastructure and if deposit services reduce, making it hard for the banks to have access to liquid cash for loan maintenance, then interest rates will then go up. Invariably, that may reduce patronage and consequently reduce the businesses of such banks.

Banks around the world have been discussing different application models for blockchain and cryptocurrencies. One such possibility involves CBDC, and talks about facilitating cross-border payment infrastructures. Banks have identified CBDCs as a government type of cryptocurrency which will constitute the exactness of a fiat currency.

At last, one thing some central banks around the world and crypto-enthusiasts could agree on is that a digital asset built on the blockchain could represent a store of value as well as a medium of exchange, and possibly capable of replacing the legacy fiat currency formats.

A CBDC could play a significant role in mass adoption of cryptocurrency. However, as exciting as that may sound for Seoul-based crypto enthusiasts, the South Korean central bank has a differing opinion.

The bank did say last week that it is not rushing into issuing a CBDC even though many financial institutions around the globe are more welcoming to the prospects of the financial instrument. The report published by the bank further reiterates its stance on the subject of CBDC.

 

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Canada Gets First Bitcoin-Backed Loan Service for Businesses, Consumers

Ledn Inc has become the first company to offer Canadian dollar loans to businesses or individuals accepting Bitcoin as collateral.

Founded by Bitcoin bull Mauricio Di Bartolomeo, Ledn is attempting to fill a gap in the market for Canadian citizens who need to borrow money but are unable to do so for whatever reason through the traditional banking sector. Bitcoin is a relatively popular investment choice for Canadians, with around 5% of the population reportedly owning the cryptocurrency.

The first of these loans have already been issued to Bylls, a Bitcoin payment processor operated by Satoshi Portal. Francis Pouliot, CEO of Satoshi Portal, explained that as a self-funded blockchain startup with profits in Bitcoin, it was never able to leverage capital for reinvestment as fiat-earning companies can. Using its Bitcoin funds as collateral for a loan means that the company does not have to sell its coins for new investment money. Using Bitcoin also to receive fiat credit also means it can avoid some of the price volatility of the cryptocurrency market.

There are some risks to this alternative loan method, however. One of these is custody issues; with no third party cryptocurrency custody service operating in Canada, Ledn is relying on cold wallets to store the funds which should theoretically make it impossible for hackers to gain access. If the loan recipient sends the Bitcoin to the wrong address they could also lose this money.

Market volatility means that margin calls are also a risk in the process, with assets potentially losing or gaining significantly in the space of hours, leading to difficulties between the two parties in terms of how much collateral needs to be sent. A sharp drop in the Bitcoin market could mean that the borrower no longer has enough to provide Ledn to get its loan.

Unchained Capital is a firm in the US that offers similar cryptocurrency-backed loans, although its target client is market investors.

Despite issues of volatility and custody, these emerging loans are offering a whole new way to do finance, recognizing cryptocurrency as a tangible asset that can be used and trusted. It brings a lot of potential for blockchain startups looking for funding but turned away from traditional loans because they do not operate primarily in fiat.

 

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