Fully integrating a stablecoin or central bank digital currency into the economy would destabilize banks but improve household welfare, a study released by a United States Treasury division has claimed. The harm to banking caused by digital currencies could be “significant” in times of stress, it found.

The Office of Financial Research study considered a theoretical “stable state” in the financial sector, after a stablecoin or CBDC had been successfully introduced. This contrasts with studies that looked at the risks of bank runs and disintermediation caused by the introduction of the digital currencies.

The authors of the present study saw a risk of systemic deleveraging, that is, a reduction in banks’ equity, leading to reduced stability in times of crisis after the introduction of a digital currency.

Fully integrating a digital currency may improve household welfare, but banking sector stability could suffer.

The @ofrgov explains why in a new blog post here https://t.co/xMzbjadrZR.
For a deeper dive, click https://t.co/4fIpSOCYfm

— Office of Financial Research (OFR) (@OFRgov) March 22, 2023

With a stablecoin or CBDC in place in the economy, they argued, bank deposits would “compete” with the digital currency within households’ liquidity portfolios. That would cause banks to reduce the spread between lending and deposit rates by raising interest paid on deposits, leaving them with less equity than they would have without digital currencies being present.

Related: US exploring ways to guarantee the country’s 18T of bank deposits: Report

Households would benefit from the competition between banks and digital currency. The authors wrote:

“In our benchmark calibration, in which we calibrate the elasticity between digital currency and deposits to the estimated elasticity betwe

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Author: Derek Andersen

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