US Treasury Research: Digital Currency May Reduce Financial System Volatility, but May Bring Risks to Banks

On March 23, the Financial Research Office of the US Treasury Department recently released a research report stating that financial frictions may limit the potential benefits of digital currencies, whether publicly issued as central bank digital currency (CBDC) or privately issued as stable currency. In addition, when digital currencies are fully integrated, the volatility of the financial system will decrease and household welfare will improve, but the stability of the banking sector will be affected.

Interpretation of this information:

The US Treasury Department’s Financial Research Office released a report on March 23 discussing the potential benefits and drawbacks of digital currencies like stablecoins and central bank digital currencies (CBDCs). They pointed out that there could be financial frictions preventing these currencies from achieving their full potential benefits. These frictions could come from regulations, trust issues, or other barriers that limit the use of these digital currencies.

The report notes that once these digital currencies are fully integrated, the volatility of the financial system could potentially decrease. This could be due to the fact that digital currencies could provide a more stable and transparent financial system, especially as they become more widespread and accepted. The increased use of digital currencies could also lead to improved household welfare, as they offer a fast and secure way to make transactions.

However, the report also cautioned that the stability of the bankingsector could be affected by the widespread adoption of digital currencies. One of the biggest concerns is the potential for bank runs, as customers may choose to withdraw their deposits and keep their funds in digital currencies instead. This could leave banks with less liquidity, which would in turn limit their ability to extend loans and credit to customers.

Overall, the report suggeststhat while digital currencies have the potential to provide benefits to the financial system and the general public, there are also some risks that need to be carefully considered. The Treasury Department is likely to continue to study the impact of digital currencies on the economy and the financial sector in the coming years.