Central bank digital currencies (CBDCs) could potentially facilitate powerful, directed “money drops” and raise inflation expectations, according to a March 31 report by Bank of America.
“CBDCs could boost the future transmission of monetary and fiscal stimulus,” the bank’s analysts wrote.
While the report doesn’t mention bitcoin (BTC), the analysis shows how countries’ adoption of CBDCs might indirectly create extra demand for the largest cryptocurrency as an investment hedge against inflation.
The Bank of America report, titled “Digital Love: Central Bank Digital Currencies,” explained the benefits of CBDCs, including their potential to increase the speed of domestic and international payment systems, while lowering costs.
Those advantages could make it easier for governments and central banks to distribute stimulus money, according to the report.
- "CBDCs represent the next frontier for central bank stimulus, potentially acting as a potent conduit for policies such as stimulus checks, emergency lending programs, UBI (universal basic income), inducing a more powerful, directed 'money drop.' The evolution of central bank digital currencies is likely to increase inflation expectations, boosting the case for inflation assets in the 2020s."
- Disruption from cryptocurrencies "is prodding central banks to secure their role as the dominant means for settlement of payments, and their ability to supervise banks and conduct monetary policy,” wrote Bank of America.
- Digital currencies issued by central banks could provide disadvantaged populations with greater access to financial services without bank intermediation, according to the report.
- "CBDCs could also speed the delivery of directed stimulus or helicopter drops. For example, many of the [Federal Reserve's] recent pandemic credit programs were hampered by legal and logistical issues," including the Main Street Lending Program, which has extended only $31 billion of its $600 billion authorization.
- "The existence of a CBDC would likely have allowed simpler designs and facilitated the targeted extension of credit. In cooperation with fiscal authorities, stimulus could be surgically tailored. In contrast to broad fiscal measures like the recent $1,400 stimulus checks issued by the U.S. Treasury, governments could credit smaller amounts to specific populations or industries to achieve their policy aims."
- However, the report also lists potential drawbacks. Governments could obtain access to private individual spending data.
- There's also a crowding-out effect: “CBDCs could compete with banks and money funds by providing another option to store value, curtailing cheap deposit funding for banks and reducing margins on money funds.”
- Bank of America expects the evolution of CBDCs to increase inflation expectations, boosting the case for inflation assets over the next few years.