Office of Financial Research study on CBDCs and Stablecoins
The Office of Financial Research, a division of the United States Treasury, recently released a study on the effects of integrating central bank digital currencies (CBDCs) and stablecoins into the economy.
The study examined these digital currencies’ potential benefits and risks, and its findings are likely to have significant implications for the financial sector.
Fully integrating a digital currency may improve household welfare, but banking sector stability could suffer.
— Office of Financial Research (OFR) (@OFRgov) March 22, 2023
Potential benefits: improved household welfare
The study found that integrating a stablecoin or CBDC into the economy could improve household welfare. This is because bank deposits would have to compete with digital currencies for households’ liquidity portfolios, supposedly leading to increased interest rates on deposits.
The authors estimated that this competition could result in welfare gains of approximately 2% in terms of consumption-equivalent.
Potential risks: destabilization of banks
The authors noted that digital currencies could cause systemic deleveraging, reducing banks’ equity and reducing stability in times of crisis.
The study also found that the harm to banking caused by digital currencies could be significant in times of stress. However, the study also highlighted potential risks associated with integrating digital currencies into the economy.
Potential solutions: limits on digital currency issuance
The study suggested that profit-maximizing issuers in a competitive market might outperform digital currency. It was also noted that financial frictions may limit the potential benefits of digital currencies and that the optimal level of digital currency may be below what would be issued in a competitive environment.
Therefore, limits on digital currency issuance may be necessary to prevent adverse effects on the banking system and households.
Conclusion: implications for the financial sector
The study’s findings are likely to have significant implications for the financial sector, particularly as governments worldwide consider introducing CBDCs and stablecoins.
While digital currencies may benefit households, their potential risks to banks and the financial system must also be considered. The study suggests that policymakers must carefully weigh these risks and benefits when integrating digital currencies into their economies.