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    Home » The potential effects of CBDC, its future of stablecoins
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    The potential effects of CBDC, its future of stablecoins

    June 1, 2022Updated:September 16, 20222 Mins Read16 Views
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    The Federal Reserve of the United States issued a study on the potential effects of a retail central bank digital currency (CBDC) on monetary policy implementation in the United States on Tuesday. “

    A paper titled “Retail CBDC and US Monetary Policy Implementation: A Stylized Balance Sheet Analysis.” published in April.

    The paper considered 4 scenarios that illustrate the potential effects of a retail CBDC on monetary policy from the perspectives of 3 stakeholder groups:

    • The Fed
    • Commercial banks
    • US households

    The first scenario involves exchanging cash for CBDC. Which had no effect on policy implementation but did affect asset categorization at the Fed and in the household concerned. The cascade impact in the following 3 instances began with individuals withdrawing a CBDC from a commercial bank after the money had been deposited as cash.

    The scenarios went on to explore commercial banks’ reactions. Commercial bank needs to the decline in cash reserves caused by CBDC withdrawals, assuming fixed-bank demand for reserves.

    If the withdrawals cause a reserve gap. Banks can either sell particular securities or loans to replenish their cash reserves. Another way, they can raise deposits by giving more attractive conditions on their products. By keeping deposits in banks longer, this could lead to higher short-term interest rates and lower demand for CBDCs.

    If interest rates rise too quickly, the Fed may use the discount window and standing repo facility to regulate them. But if that fails reserve management purchases would be the next step. Those technical procedures are thoroughly covered.

    “The possible consequences on monetary policy implementation from a retail CBDC are significantly reliant on the beginning settings of the Federal Reserve’s balance sheet” the authors write. Their research also showed the impact of retail CBDCs on monetary policy implementation using existing instruments.

    Source: Cointalegraph

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