A new report posted by BitMEX Research goes in details about the two approaches that governments can take with regards to the issuance of a Central Bank Digital Currency (CBDC) and the ramifications for the economy. As the new BitMEX report shows, the money supply is now largely determined by the banks’ ability and/or willingness to make loans.
“From a liquidity perspective, the largest deposit-taking institutions in an economy have an almost unconstrained capability to create new loans, since the funds loaned out will automatically get placed back into their own bank as a deposit,” the report states.
The only exception to this rule is the “physical cash” since “banks need to finance out of reserves” as the post mentions.
Still, what we don’t see in the cryptocurrency news and this report are the new measures by the Federal Reserve which have been in place for decades to avoid bank runs. In theory, banks have the ability to create an infinite money supply. But in practice, this is unlikely to happen as the Celsius Network CEO Alex Mashinsky claims:
“Based on new rules, they can go to the Fed and borrow as much money as they want. 1.5 Trillion permanent repo. But there is no liquidity in the market, they don’t trust each other.”
The new BitMEX report also stipulates that central banks can have two approaches to the issuance of CBDCs. They can either ban all cash or instead allow “the general public to make electronic deposits at the central bank.”
If the first choice is selected, this would “remove the one remaining liquidity constraint on the banks, allowing them to expand credit and create new money, almost at will.” If the latter one is selected, it would “provide an extremely powerful way for people to exit the commercial banking system, which is likely to heavily constrain the banks’ ability to create credit.”
The new BitMEX report concludes that the first approach is more likely to be chosen since:
“[It is] reasonably consistent with other political and economic trends, namely: increases in experimental and expansionary monetary policy, increased state surveillance, increased use of the internet and electronic systems, increased levels of protection for the banking system, increased levels of state power.”
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