• A study released by the United States Treasury division has claimed that integrating a stablecoin or central bank digital currency into the economy could destabilize banks but improve household welfare.
• The authors of the study saw a risk of systemic deleveraging, which would reduce banks’ equity and lead to reduced stability in times of crisis after the introduction of a digital currency.
• Households would benefit from competition between banks and digital currency, however financial instability caused by too much competition could have a negative effect on households.

Adopting CBDC Could Destabilize Banks

A study released by the United States Treasury division has claimed that integrating a stablecoin or central bank digital currency into the economy could destabilize banks but improve household welfare. When integrated into the economy, a central bank digital currency or stablecoin would compete with bank deposits to the public benefit, at least until a financial crisis.

Risk Of Systemic Deleveraging

The authors of the present study saw a risk of systemic deleveraging, which is when there is reduction in banks’ equity leading to reduced stability in times of crisis after the introduction of a digital currency. This could be significant during times or stress for banking institutions.

Household Benefits From Competition

Households would benefit from competition between banks and digital currencies as it would lead to higher interest rates on deposits for households. The authors wrote: “In our benchmark calibration, in which we calibrate the elasticity between digital currency and deposits to the estimated elasticity between deposits and cash, we find plausible welfare gains on the order of 2% in terms of consumption-equivalent.”

Negative Effect On Households

However if digital currencies competed too well with bank deposits this could lead to financial instability which may have an overall negative effect on households.

Conclusion

In conclusion, adopting CBDCs may help increase household welfare but may also lead to financial instability due to increased competition between banks and cryptocurrency companies. It is important for policy makers to consider both potential benefits and risks before implementing any new regulations related to cryptocurrencies or CBDCs.