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Treasury Department Says Banks’ CBDC Fears Are Overblown

 |  July 25, 2022

Bankers’ 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).

US lawmakers – much like their counterparts in other jurisdictions, such as Europe – have introduced a bill that would allow the US Treasury to create a digital dollar. The electronic dollar, a virtual representation of a US dollar, would allow people to make payments using tokens on mobile phones or through cards versus cash.

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. The complaints are somewhat different to the opposition among citizens that has emerged in Europe, which mostly focused on fears of loss of privacy and increased government control affecting individuals.

Read More: EU Faces Citizens’ Opposition In Race For Digital Euro

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.

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