• The US Treasury recently conducted a study on the potential impact of introducing central bank digital currency (CBDC).
• The results showed that CBDCs could destabilize the banking sector while potentially boosting household welfare.
• Additionally, the research suggested that CBDCs could reduce financial system volatility as asset price volatility would decrease after integration.
Study Reveals Impact of Central Bank Digital Currency
The United States Treasury recently released a study into the potential effects of introducing a central bank digital currency (CBDC) to the economy. It found that CBDCs could have both positive and negative impacts on the banking sector and households.
Impact Of CBDC On Banks
The Office of Financial Research’s study concluded that introducing a CBDC or stablecoin to the economy could lead to increased competition between digital currency and bank deposits, forcing banks to increase deposit interest rates in order to remain competitive. This could result in reduced equity for banks and a credit crunch due to decreased lending activities, posing systemic risk.
Benefits For Households
However, there may be some benefit for households as competition between digital currency and banks pushes up deposit interest rates – leading to an estimated 2% gain in consumer welfare. Nevertheless, this is only temporary as instability caused by competition may eventually outweigh any benefits experienced by households.
System Volatility May Also Decrease
Apart from the potential detriment for banks and benefit for households, introducing central bank digital currencies may also reduce overall financial system volatility due to lower asset price volatility after integration with CBDCs.
US Lawmakers Express Dissatisfaction With Developing Central Bank Digital Currencies
Prior to this new bill, US lawmakers had expressed their dissatisfaction with developing central bank digital currencies (CBDCs), citing concerns over privacy protection for investors in digital assets if such currencies were issued by the Fed.