Increasing Stability in the Digital Payment Space: The Potential Institutional Benefits of Central Bank Digital Currencies

Nina Eichacker

No 8muc4, SocArXiv from Center for Open Science

Abstract: In recent years, cryptocurrencies have become more salient as speculative assets, and as sources of instability for wider swathes of the public. This has occurred at a global level, with both domestic and international spillover effects for core and peripheral economies. At the same time, analysts of cryptocurrency and blockchains have identified some institutional benefits of these innovations, including the ability to process payments outside of traditional business hours and the potential to provide banking services for households and institutions in regions that lack access to a formal banking sector. This paper considers how central banks’ efforts to create formal digital currencies may stabilize financial and monetary conditions. By offering a formal digital currency, central banks have the potential to diminish payment related demand for cryptocurrencies, and decrease the exposure households have to the volatility of cryptocurrency asset markets as well as to fraud endemic to the cryptocurrency markets. Offering a formal digital currency may be seen as a monetary form of public finance; in this case, the public alternative is a country’s own currency that may be usable in the blockchain, rather than forcing households to search for the most reputable or stable cryptocurrency alternatives. As households and businesses adopt CBDCs, they may leave cryptocurrency markets; while this might induce a brief period of instability in those markets, it would likely leave more volatile crypto asset markets to those best suited to managing the risk and potential reward of betting on existing assets, and insulate the risk averse from that volatility.

Date: 2025-01-15
New Economics Papers: this item is included in nep-cba, nep-mon and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:osf:socarx:8muc4

DOI: 10.31219/osf.io/8muc4

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