Full integration of a stablecoin or central bank digital currency (CBDC) into the economy would destabilize banks but improve household welfare, claims a study published by a division of the US Treasury. The damage to banking caused by digital currencies could be "significant" in times of stress, he found.
The study of the Office of Financial Investigation considered a theoretical โsteady stateโ in the financial sector, after stablecoin or CBDC was successfully introduced. This is in contrast to studies that have looked at the risks of bank runs and disintermediation caused by the introduction of digital currencies.
The authors of the present study saw a risk of systemic deleveraging, that is, a reduction in the capital of banks, leading to less stability in times of crisis after the introduction of a digital currency.
The full integration of a digital currency may improve household welfare, but the stability of the banking sector could be affected.
He @ofrgov explains why in a new blog post here https://t.co/xMzbjadrZR.
For a deeper dive, click https://t.co/4fIpSOCYfmโ Office of Financial Investigation (OFR) (@OFRgov) March 22, 2023
With a stablecoin or CBDC in the economy, they argued, bank deposits would "compete" with digital currency within household liquidity portfolios. That would cause banks to reduce the spread between lending and deposit rates by increasing the interest paid on deposits, leaving them with less capital than they would without the digital currencies present.
Related: US exploring ways to secure country's 18 trillion bank deposits: report
Households would benefit from competition between banks and digital currency. The authors wrote:
โIn our baseline calibration, in which we calibrated the elasticity between digital currency and deposits to the estimated elasticity between deposits and cash, we found plausible welfare gains of the order of 2% in terms of equivalent consumption.โ
If the digital currency were to compete too well with bank deposits, the resulting financial instability could have a negative effect on households, according to the study. Furthermore, even when that is not the case, digital currencies may not be the best way to increase public welfare. โProfit-maximizing issuers in a competitive marketโ could outperform digital currency. The authors concluded:
โOur results suggest that financial frictions may limit the potential benefits of digital currencies, and the optimal level of digital currency may be below what would be issued in a competitive environment.โ
The study used dense, advanced mathematics and economic theory to advance its arguments. It appeared on March 22, the same day as the White House published the Economic Report of the President. The presidential report also raised concerns about the potentially damaging effects of a CBDC economically integrated into the banking system.
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