• The US Treasury recently conducted a study which showed that the introduction of Central Bank Digital Currency (CBDC) could potentially destabilize the banking sector while also having the potential to boost household welfare.
• US lawmakers have expressed dissatisfaction with developing central bank digital currencies, as it may affect the privacy protection of digital asset investors.
• The study also revealed that apart from banks’ destabilization and boost in household welfare, introducing a CBDC may decrease financial system volatility by lowering asset price volatility.
Introduction
A recent United States Treasury study has found that introducing a Central Bank Digital Currency (CBDC) could have both positive and negative effects on the economy. On one hand, it could potentially destabilize the banking sector but on the other hand, it might also lead to an increase in household welfare. In addition to this, there is a possibility that system volatility may decrease due to lower asset price volatility.
US Lawmakers’ Dissatisfaction
US lawmakers have expressed dissatisfaction with developing central bank digital currencies (CBDCs). They fear that doing so will affect the privacy protection of digital asset investors. As such, they introduced new legislation prohibiting the Federal Reserve from developing and issuing CBDCs without further consideration.
Impact Of CBDC On Banks
The Office of Financial Research’s study suggests that introducing a CBDC or stablecoin into the economy could result in increased competition between digital currency and bank deposits. This could lead to banks paying higher rates on deposits in order to stay competitive, thereby reducing their equity and leading to a credit crunch and systemic risk. However, households may gain up to 2% due to this competition between digital currency and banks.
System Volatility May Also Decrease
Apart from banks’ destabilization and boost for households, introducing central bank digital currencies may also decrease financial system volatility by decreasing asset price volatility. This could create more stability within markets as well as reduce risk for investors in digital assets.
Conclusion
The introduction of Central Bank Digital Currencies (CDBCs) into economies can have both positive and negative effects on different areas of society – from households to financial institutions alike. In particular, there is potential for increased competition between traditional banking systems with digital currencies leading to reduced equity for banks as well as decreased systemic risk through lowered asset price volatility should CBDC be implemented successfully into an economy