• The US Treasury recently conducted a study into the potential impacts of introducing central bank digital currencies (CBDCs).
• Results showed that this could potentially destabilize the banking sector, while also having the potential to boost household welfare.
• Introducing CBDCs may decrease financial system volatility and raise competition between digital currency and bank deposits.
Study Reveals Potential Impacts Of Central Bank Digital Currencies
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. However, there are chances that this occurrence will be beneficial to households. According to the research, there will be a slight gain of up to 2% for consumers amid the competition between digital currency and banks. It also noted that the benefit might not last if the competition favors digital currency, as households will face financial instability due to reduced equity for banks.
System Volatility May Also Decrease
The study also revealed that apart from banks’ destabilization and boost in household welfare, introducing the central bank digital currency may decrease financial system volatility. This possibility is hinged on asset price volatility dropping after integrating CBDC into