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Although central bank-issued digital currencies (CBDCs) were intended to behave like paper money, in digital form, they may, in practice, give more power to traditional financial institutions.

With the prospect of banks instituting negative interest rates to stimulate consumption and boost the economy, many citizens may prefer to keep cash to avoid losses. In other words, by saving paper money “under the mattress”, users imagine preventing possible losses due to negative interest rates.

The subject is the theme of an article published by the Wall Street Journal on September 8. In it, columnist James Mackintosh considers that people tend to keep physical money, even without any income, rather than risk losing money with digital currencies issued by central banks.

Negative interest rates weaken national currencies

It is worth explaining that negative interest rates are used as a resource by financial institutions in times of economic crisis to encourage consumption and credit. Currently, in the United States, such rates stand at 0.25%, according to the Federal Reserve Economic Research. However, at the start of the pandemic, in March 2020, rates fell to zero.

In addition, several central banks have already adopted negative interest rates:

  • The European Central Bank has a rate of -0.5%.
  • The Bank of Japan is at -0.1%.
  • The Swiss National Bank is at -0.75%.
  • Denmark has an interest rate of -0.5%.

However, while negative interest rates combat deflation, these policies can also weaken the savings potential of these currencies.

In addition, experts warn that digital currencies also bring points of attention to users, such as the possibility of expiration after a specific date or the linking of their use to a certain set of assets, besides the possibility of giving banks greater leverage power with interest rates.

But according to the Wall Street Journal article, the head of the Bank for International Settlements’s Innovation Center, Benoît Coeuré, said central banks are working to prevent CBDCs from being seen as an instrument of monetary policy.