The US Treasury has said that launching a central bank digital currency (CBDC) can boost the banking sector’s stability. The data was shared as part of a research paper released on Tuesday by the institution’s department of Financial Research.
US Treasury advocates for a CBDC
This report comes amid concerns that a CBDC could trigger bank runs on weak banking institutions. The research paper referred to researchers’ claims that a CBDC could make runs more likely and severe, saying that a properly designed CBDC could significantly lower banking risks.
The paper also provided arguments on how CBDCs would benefit the financial sector. In the first argument, the authors developed a mathematical model in which banks borrowed money for a shorter duration than they issued loans as insurance against liquidity risk. Such instances could trigger financial fragility causing a bank run.
Your capital is at risk.
However, if a CBDC was in the picture, the possibility of suffering from a liquidity shock was significantly lower for the depositors, hence banks could offer less insurance against a liquidity crisis by providing more stability for the financial sector. A CBDC could adjust the private financial arrangements and stabilize the financial system instead of destabilizing it.
The research paper also looked at a CBDC’s role in making information readily available. With a CBDC, banks with weak financial positions can hide from regulations to avoid being detected. Hiding such information could worsen the matter by causing a delayed response.
With a CBDC, it would be easy for regulators to detect the situations where the funds were converted and not withdrawn from the bank. If problems are detected soon enough, it can facilitate fast resolutions. CBDCs also made it easier for the central bank to react to a crisis, and this access to information made CBDCs better assets for boosting financial stability.
CBDCs should be free
The research paper also stressed that CBDCs needed to be allowed to run freely. Adding fees, caps, and other restrictions to CBDCs during times of crisis was not recommended because of the dangers posed. Limiting policies tended to undermine the potential benefits of CBDCs, use, and attractiveness.
The research paper’s authors further said that access to information was also a major benefit for the policymakers. Such information could have a wide range of use cases.
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