According to the report published on March 22 by a section of the US Treasury, implementing a stablecoin or central bank digital money into the economy will destabilise banks while enhancing family welfare. The report discovered that digital currencies may affect banks in a “significant” way under the times of crisis.
It is said in the report that for a stablecoin or a CBDC to be implemented in the economy, financial institutions would “compete” with the digital currency in terms of liquidity portfolios for people. Due to the competition between banks and the virtual currency, households are the recipients of the benefits.
The report stated that, “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.” Digital currencies might not be the greatest approach to improve public welfare even when that is not the case.
However, the study examined by the Office of Financial Research explored a “stable state” in the financial industry following the effective launch of CBDC or a stablecoin. In contrast to it, the current research that examined the dangers of bank runs and disintermediation brought on by the adoption of digital currencies found the opposite.
The current study after the adoption of a digital currency perceived a danger of systemic deleveraging, or a decline in bank equity, which would result in less stability during times of crisis. The report also added that the 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.
As per the study, consumers may suffer from the consequent financial instability if digital currency outperforms bank savings. Concern over the possible negative impact of an economically integrated CBDC on the financial sector was also raised in the released the Economic Report of the President.