Digital Dollar Could Be Good for Financial Stability, US Federal Researchers Say

Though critics of a central bank digital currency have warned it could amplify bank runs, the Office of Financial Research says it may actually help.

AccessTimeIconJul 12, 2022 at 7:32 p.m. UTC
Updated May 11, 2023 at 5:11 p.m. UTC

A government-issued digital dollar could actually help stabilize a wobbly financial system in key ways, according to U.S. federal researchers who issued a paper Tuesday. The findings may counter financial lobbyists hoping to steer the government away from such a currency.

The Office of Financial Research (OFR) – an arm of the U.S. Treasury Department that studies risks to the financial system – looked into how a central bank digital currency (CBDC) would affect the inner workings of U.S. finance, and the paper concluded that worries about a future panic driving people to rapidly move assets into digital dollars may be overblown.

The paper’s authors said a CBDC would give the government an early-warning system, acting like a canary in the coal mine that it can study for signs of distress. More flows into digital dollars would tell regulators that trouble could be brewing.

“Observing the flow of funds into a CBDC can allow policymakers to infer when a run by a bank’s depositors is underway more quickly and to place troubled banks into resolution sooner,” according to the paper, written by Todd Keister at Rutgers University and Cyril Monnet from the University of Bern. And knowing that such activity will trigger concern with watchdog agencies may further discourage big depositors from pulling out funds and triggering that process.

The existence of a CBDC during normal times would also set up less incentive for depositors to run from a weak bank when a crisis erupts, they said, because it will have removed some of the benefits of “maturity transformation” in which banks gain from borrowing money on shorter terms than they lend it out at. So banks would be a bit more stable before the crisis happens, the OFR paper said.

Jaret Seiberg, an analyst at Cowen Group, said the OFR report seems to be pushing back on Wall Street bankers’ objections to the digital dollar. “We see [the report] as a tool that digital dollar advocates can use to justify proceeding with plans to prepare a central bank cryptocurrency for launch,” Seiberg wrote in a Tuesday research note to clients.

Federal Reserve Vice Chair Lael Brainard, whose agency would ultimately be the one issuing a digital dollar, also made some positive remarks about a potential CBDC last week. “A digital native form of safe central bank money could enhance stability by providing the neutral trusted settlement layer in the future crypto financial system,” Brainard said, though she’s previously warned that the effort to launch a CBDC in the U.S. could take the Fed as long as five years.


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Jesse Hamilton is CoinDesk's deputy managing editor for global policy and regulation. He doesn't hold any crypto.

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