A study released by the Office of Financial Research (OFR) on 22 March claimed that fully integrating a stablecoin or central bank digital currency (CBDC) into the economy would destabilize banks while improving household welfare.

The OFR, a United States Treasury bureau, has claimed that the harm caused by digital currencies to the banking system could be “significant” in times of stress.

The study considered a theoretical “stable state” in the financial sector following the successful implementation of a CBDC. It observed a risk of systemic deleveraging, that is, a fall in bank equity, leading to reduced stability in times of crisis once a digital currency has been introduced.

The study also contended that, with a CBDC in place, bank deposits would “compete” with the digital currency in the liquidity portfolios of households. As a result, banks would reduce the spread between lending and deposit rates by increasing interest paid on deposits, leaving them with less equity than they would have without the presence of digital currencies.

(By Suzuki Shillsalot)