CBDC adoption could destabilize banks: U.S. Treasury study

• A U.S. Treasury study claims that fully integrating CBDCs into the economy would destabilize banks.
• A recent White House report criticized stablecoins, claiming that they are too vulnerable to run risks to fulfil their role as a “fast payment” instrument.

A study released by the Office of Financial Research (OFR) on 22 March claimed that fully integrating a stablecoin or central bank digital currency (CBDC) into the economy would destabilize banks while improving household welfare.

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

The OFR, a United States Treasury bureau, has claimed that the harm caused by digital currencies to the banking system could be “significant” in times of stress.

The study considered a theoretical “stable state” in the financial sector following the successful implementation of a CBDC. It observed a risk of systemic deleveraging, that is, a fall in bank equity, leading to reduced stability in times of crisis once a digital currency has been introduced.

The study also contended that, with a CBDC in place, bank deposits would “compete” with the digital currency in the liquidity portfolios of households. As a result, banks would reduce the spread between lending and deposit rates by increasing interest paid on deposits, leaving them with less equity than they would have without the presence of digital currencies.

According to the study, if digital currency competed too well with bank deposits, the resulting financial instability could harm households. Besides, even if this is not the case, digital currencies may not be the most effective means of increasing public welfare.

CBDCs facing the wrath of the U.S. establishment

Only two days earlier, the White House released the Economic Report of the President that criticized crypto assets for failing to deliver on their “touted” benefits. The report argues that cryptocurrency does not improve payment systems or promote financial inclusion, as crypto believers claim. The report also criticizes stablecoins, claiming that they are too vulnerable to run risks to fulfil their role as a “fast payment” instrument.

Florida Governor Ron DeSantis (Rep.) introduced legislation earlier this week to prohibit the use of central bank digital currency (CBDC) in his state, citing concerns about mass surveillance.

Rep. Tom Emmer (R-Minn.), the Majority Whip in the United States House of Representatives, proposed the CBDC Anti-Surveillance State Act last month, aimed at preventing a CBDC in the United States.

One year ago, the Biden administration had issued an executive order on responsible development of digital assets, but the development over the issue has been slow.

Earlier this month, Federal Reserve Chairman Jerome Powell said that CBDCs should not be expected in the U.S. soon because the Fed has yet to make any real decisions. Powell was testifying before the House Financial Services Committee, fielding a series of questions about digital assets.