According to U.S. federal academics who published a report on Tuesday, the Central Bank Digital Currency (CBDC) may play a significant role in stabilizing an unstable financial system. The results might undermine the efforts of financial lobbyists to convince the government not to adopt such a currency.
In examining how a central bank digital currency (CBDC) would impact the workings of U.S. finance, the Office of Financial Research (OFR), a division of the U.S. Treasury Department that studies risks to the financial system, came to the conclusion that concerns about a future panic driving people to quickly move assets into digital dollars may be exaggerated.
The Central Bank Digital Currency, according to the paper’s authors, would provide the government with an early-warning system, operating as a canary in a mine that it can monitor for warning indications of trouble. More inflows into digital currency would alert regulators to potential problems.
The paper written by Todd Keister, Rutgers University, and Cyril Monnet, University of Bern, stated,
“Observing the flow of funds into a CBDC can allow policymakers to infer when a run by a bank’s depositors is underway more quickly and to place troubled banks into resolution sooner.”
It also emphasizes how substantial depositors might be deterred from withdrawing money and starting that procedure if they know that doing so will raise concerns with watchdog authorities.
Perks of a CBDC
Since a CBDC would have eliminated some of the advantages of “maturity transformation,” in which banks profit from borrowing money at shorter periods than they give it out at, depositors would have less motivation to flee a weak bank when a crisis arises, they claimed. According to the OFR research, banks would thus be a little bit more stable before the crisis occurs.
According to Cowen Group analyst Jaret Seiberg, the OFR research appears to be countering Wall Street bankers’ criticisms of the digital currency.
In a research note to clients, Seiberg wrote,
“We see [the report] as a tool that digital dollar advocates can use to justify proceeding with plans to prepare a central bank cryptocurrency for launch.”
Lael Brainard, vice chair of the Federal Reserve, who would ultimately be in charge of creating a digital dollar, also expressed support for a prospective CBDC last week.
However, Brainard seems very optimistic about the whole approach, in spite of being aware that the effort to launch a CBDC in the US could take the Fed as long as five years.