Banks’ fears that a digital dollar would cost them depositors — and even make financial crises more severe — are overblown, according to a new Treasury Department report.
Actually, a U.S. central bank digital currency (CBDC) could strengthen financial stability, according to the Office of Financial Research (OFR).
The digital dollar only exists in theory, but banks worry that it would “make it more attractive for short-term creditors to pull funds out of banks and other financial institutions in periods of financial stress,” in favor of more secure CBDC deposits, which would be 100% backed by the Federal Reserve, researchers Todd Keister and Cyril Monnet noted in the report.
Banks’ lobbyists have argued that it would also pull liquidity out of the system, as they would have less funds to loan.
For one thing, the OFR report noted, a digital dollar would provide regulators with a “red flag” for weak banks, helping nip runs in the bud, and also discourage struggling banks from using maturity transformations that can ultimately increase exposure to runs.
The Fed has a new, crypto-knowledgeable top banking regulator, Michael Barr, sworn in last week as its vice chair for supervision. A former adviser to crypto cross-border payments firm Ripple, Barr will have a big impact on the design and approval of a digital dollar, as well as on U.S. and global regulation of stablecoins, which are a driving force in most central banks’ decision to build CBDCs, or at least investigate them.
The Bank for International Settlements (BIS) also had a couple of things to say about CBDCs over the past week, beginning with a call for countries to develop interoperable CBDCs that can be used across borders.
A report to the Group of 20 richest economies (G20) by the BIS, World Bank and International Monetary Fund (IMF) said that interoperable CBDCs could solve many cross-border payments problems, including high costs and slow speeds, and improve inclusions. But it didn’t call them a panacea, suggesting that there may be room for regional interoperability, as CBDCs are designed for different needs. It also called for cooperation on design at an early stage.
In the European Union, European Central Bank (ECB) President Christine Lagarde — an early and passionate supporter of CBDCs — published a blog post on July 13, saying that a digital euro could be “an anchor for the whole payment system.”
Arguing that stablecoins and other privately-issued cryptocurrencies “cannot truly replicate the role of central bank money,” Lagarde and ECB Executive Board Member Fabio Panetta argued that CBDCs would prevent the payments sector from being dominated by a handful of private digital assets that would be prime tools for “market-abusive behavior.”
They added that “the digital euro can only be successful if it becomes part of the everyday lives of Europeans. It must add value compared with existing solutions.”
The Bank of France, meanwhile, announced that its experimentation with wholesale CBDCs, which it believes could streamline domestic and international interbank transactions, has entered a second phase. Its governor, François Villeroy de Galhau, would allow the tokenization and on-chain settlement of securities, as well as cross-border and cross-currency settlements.
They could “prevent market and liquidity fragmentation,” he said, adding, “This technology also streamlines the information flows in financial markets, from trading to exchange procedures and settlement.”
Meanwhile, in China, where the digital yuan (e-CNY) is at the final testing stages of a full rollout, the People’s Bank of China announced the doubling of its digital yuan test sites, which will now include 15 of its 31 provinces and autonomous regions, Cointelegraph reported.
The e-CNY has been used in 264 million transaction worth a combined $12.35 billion as of May 31, the PBoC said, adding that more than 4.5 million merchants now accept it.
Also, South Korea’s central bank, which has completed second-stage trials of a retail CBDC, is entering a third phase that will wrap in 10 commercial banks, Ledger Insights reported. Earlier tests covered creating, issuing and using CBDCs via digital wallets, followed by offline payments, purchase of tokenized items and cross-border remittances.