Last Updated on 2 months by John Piper
According to a recent Treasury study, a stablecoin could destabilize the banking system. This might improve household financial wellbeing, but it could also lead to an economic crisis that could negatively impact households.
A study by the United States Treasury’s Office of Financial Research found that the integration of digital currencies from central banks or stablecoins into the economy could lead to bank instability. It would also improve household welfare. According to the study, digital currencies can cause significant harm to banks in times of stress. This could lead to decreased stability in times of crisis, as well as the risk that banks may lose their equity.
While fully integrating a cryptocurrency may increase household welfare, it could also affect the stability of the banking sector.
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 (@OFRgov), March 22, 2023
The study’s authors considered a theoretical stable state in the financial system after the introduction of a stablecoin (or CBDC). This contrasts with previous studies which looked at the risk of bank runs and disintermediation due to the introduction of digital currency.
According to the study, bank deposits could end up competing against digital currencies in household portfolios. Banks could reduce the spread between deposit and lending rates by increasing interest on deposits. It would ultimately leave banks with less equity that they would have without digital currencies.
This competition would be beneficial to households on paper. But, digital currency could perform better than bank deposits and this could adversely impact the same households. The study found that:
“Our results indicate that financial frictions can limit the potential benefits digital currencies. The optimal level of digital currency might be lower than what would be issued under a competitive environment.”
This study is significant because it highlights the potential economic benefits of digital currencies. It also outlines the potential risks associated with this emerging industry.
Coin Insider’s first article was entitled The US Treasury suggests that CBDC could rattle banks