Luxembourg University Postdoc: Central Bank Digital Currencies Too Attractive to Ignore

The idea of issuing a central bank digital currency is too attractive to ignore, a postdoctoral researcher from the University of Luxembourg wrote in a study.

Hossein Nabilou, a postdoctoral researcher at the Faculty of Law, Economics, and Finance of the University of Luxembourg, presented his findings in a study entitled "Central Bank Digital Currencies: Preliminary Legal Observations." The report focused on potential challenges that launching a CBDC might cause for the European Central Bank.

According to Nabilou, cryptocurrencies have significantly impacted the banking sector.

He writes how their functionality, similar to money issued by a central bank, first drew banks' attention.

Banks were also preoccupied with the idea that cryptocurrencies could ruin their monopoly on controlling the circulation of money and influence the stability of existing financial systems, Nabilou believes.

Despite the prevailing scepticism towards crypto and several failed attempts to launch a state-backed coin, such as the Venezuelan Petro, central banks are actively studying the technology behind digital currencies.

If the ECB launches a digital currency, it might lead to banking disintermediation, Nabilou continues.

Customers will get direct access to the central bank's balance sheets, and consequently there will be no reason for them to hold balances within a commercial bank, which might lead to overall banking sector instability.

Several banks in Iran have also supported a gold-backed digital currency dubbed PayMon, while Egypt is still considering a possibility of launching a CBDC. Some central bank officials have publicly shared Nabilou's view on CBDCs.

South Korea's central bank has recently issued a warning over CBDCs, stating that they would result in mass withdrawals of funds from private institutions, squeezing liquidity and pushing up interest rates.