U.S Researchers Said Digital Dollar may Improve Financial Stability

On July 12, 2022, the research sector of the US Treasury published a financial paper that shows two ways CBDC can enhance US finances. The publication goes contrary to the popular misconception that CBDC would make traditional banks run out of business.

U.S. Research Professors Claimed CBDC Is Beneficial

The two professors who undertook the research stated several ways by which CBDC would affect the traditional banking system stability. They claimed that their research revealed that digital fiat currency can reduce financial fragility and also stabilize it.

Furthermore, the professors created a model that illustrated the main bone of contention about CBDC. It centers around the belief that many people would dump traditional banking institutions if they can hold CBDC.

Recently, the central bank of Europe tweeted that there are some unfavorable situations when people lose confidence in the traditional banking system. 

In such moments, people tend to deposit their funds in digital euros rather than traditional currency. Also, the Federal Reserve similarly tweeted that people would likely choose to hold digital currency rather than use financial intermediaries.

CBDC Reduces Maturity Transformation Issued By Banks 

However, the professors via their model revealed counter effects that the presence of CBDC could create. Firstly, they claimed that when people have access to CBDC, it would enhance their ability to manage risks that come with liquidity. 

Hence, it would help decrease the number of insurance banks has to give to manage such risks. Also, they stated that digital currency would help to reduce the number of bank maturity transformations issued. 

This would help to drastically reduce the possibility of depositors moving their funds. In addition, they suggested that the shift in private financial structure may improve the stability of the financial system.

CBDC Improves Bank’s Policy Reaction Time

According to the professors, the second benefit of CBDC is that it helps to keep a record of how money flows in/out of the system. This in turn helps policymakers to ease market strains on time before they escalate. 

Additionally, knowing the flow of money into CBDC would help officials to avert potential fund shifts from a bank in distress by providing timely solutions. 

They said that when officials start responding to bank constraints rapidly, depositors would be discouraged from moving their funds. They claimed that CBDC can provide the necessary data needed to improve bank policy reactions. 

Therefore, they ascertained that CBDC would improve the stability of the financial system rather than worsen it. For the stated reasons, the two learned research professors encouraged CBDC should be adopted into the U.S. financial system.

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