Italy’s State-Owned Bank Trials Digital Bonds on Polygon Blockchain
The European Central Bank initiated the trial to explore how blockchains can enhance central bank settlement.
A recent study from the United States Treasury suggests that a stablecoin might destabilise the banking system. While this might help household financial welfare, a possible economic crisis could negatively impact households.
According to a research by the United States Treasury’s Office of Financial Research, the integration of stablecoins or central bank digital currencies (CBDCs) into the economy would destabilise banks. At the same time, it would help improve household welfare. The study suggests that harm to the banking industry caused by digital currencies could be “significant” in times of stress. This could also result in the risk of banks’ equity, leading to reduced stability during times of crisis.
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 authors of the study considered a theoretical “stable state” in the financial sector after the successful introduction of a stablecoin or CBDC, which contrasts with previous studies that looked at the risks of bank runs and disintermediation caused by the introduction of digital currencies.
The study found that bank deposits might end up competing with digital currencies within households’ portfolios. This competition would cause banks to reduce the spread between lending and deposit rates by raising interest paid on deposits. Ultimately, it would leave banks with less equity than they would have had without the presence of digital currencies.
On paper, households would benefit from this competition. However, if digital currency performed better than bank deposits, the financial instability could negatively impact the same households. According to the study:
“Our 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.”
The study is important because it highlights the potential benefits of introducing digital currencies into the economy. At the same time, it presents the possible risks associated with the emerging industry.