• The US Treasury recently conducted a study on the potential impacts of central bank digital currencies (CBDCs) on the banking sector and household welfare.
• The research found that introducing these digital currencies could lead to instability in the banking sector, reduced bank equity and increased competition between digital currency and banks.
• On the other hand, it could also result in an increase in household welfare by up to 2%, as well as decreased financial system volatility.
Introduction
Recent studies by the United States Treasury reveal that introducing central bank digital currency (CBDC) can potentially destabilize the banking sector while also having the potential to boost household welfare. Before now, US lawmakers have expressed dissatisfaction with developing central bank digital currencies (CBDCs). In a new bill, the board noted that Fed has no authority to develop and issue a central bank digital currency, as this may affect privacy protection of digital asset investors.
Impact Of CBDC On Banks
The Office of Financial Research’s study states that introducing a CBDC or stablecoin into the economy may raise competition between digital currency and bank deposits, leading banks to increase deposit interest rates so as to reduce spread between deposit and lending transactions. This action would ultimately lead to lower equity for banks due to less reliance on deposits for funding their lending activities.
Household Welfare Benefits
Despite this occurrence being potentially detrimental for banks, households might benefit from this competition in terms of increased welfare by up to 2%. However, if competition favors use of DCs over conventional banking methods, households will face increased financial instability.
System Volatility May Decrease
The study further reveals that apart from banks’ destabilization and boost in household welfare, introducing CBDC may decrease financial system volatility based on asset price volatility decreasing after integrating CBDC into the economy.
Conclusion
All in all, introducing central bank digital currencies into an economy may have both positive and negative effects depending on various factors such as preference for either traditional or decentralized methods of payment processing etc. Therefore it is important for governments around world to assess impact of such changes before taking any major decisions related to introduction of these currencies into their economies