Treasury Report Reveals Potential Benefits and Risks of CBDCs
• The United States Treasury recently released a study that showed the potential benefits and drawbacks of introducing central bank digital currency (CBDC).
• Lawmakers have expressed concern over the potential impact of introducing CBDCs on privacy protection and the banking sector.
• According to the research, CBDCs could potentially reduce asset price volatility and increase household welfare, but at the same time lead to instability in the banking sector.
Introduction
A recent study by the United States Treasury revealed that the introduction of central bank digital currency (CBDC) could potentially destabilize the banking sector while also having the potential to boost household welfare. Before now, US lawmakers expressed dissatisfaction with developing central bank digital currencies (CBDCs). In a new bill, the board noted that the Fed has no authority to develop and issue a central bank digital currency, as it may affect the privacy protection of digital asset investors.
Impact Of CBDC On Banks
Based on the Office of Financial Research’s study, the effect of these central bank digital currencies could be drastic given the economy’s current condition, and introducing a central bank digital currencies could lead to instability and reduced bank equity. Usually, banks rely on deposits to fund their lending activities, and paying higher rates on deposits could lead to a credit crunch and increased systemic risk.
Household Welfare Boosted
The research board believes establishing a CBDC or stablecoin in the economy may raise competition between digital currency and bank deposits. This may push banks to increase deposit interest rates to reduce spread between deposit transaction costs. However, there are chances that this occurrence will be beneficial to households. According tothe research, there will be a slight gain of up to 2% for consumers amid competition between digital currency and banks. It also noted that benefit might not last if competition favors digital currency as households face heat resulting financial instability.
System Volatility Reduced
The study also revealed that apart from banks’ destabilization and boost in household welfare; introducingcentral bankdigitalcurrencymay decrease financial system volatility. This possibility is hinged on asset price volatility dropping after integrating CBDC into economy.
Conclusion
Overall, introducing CBDCs can both stabilizeand destabilize certain aspects of an economy depending onexisting economic conditions . Although it can potentiallyboost household welfare through increased competition betweenbanksanddigitalcurrency ,itmayalsoresultininstabilityinthebankingsectorandreducedbank equity .
