Synthetic Central Bank Digital Currencies and Systemic Liquidity Risks

John E. Marthinsen and Steven R. Gordon ()
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John E. Marthinsen: Economics Division, Babson College, Babson Park, MA 02457, USA
Steven R. Gordon: Operations and Information Management Division, Babson College, Babson Park, MA 02457, USA

IJFS, 2024, vol. 12, issue 1, 1-17

Abstract: The failure of major banks in 2023, such as Silicon Valley Bank (SVB), Signature Bank, First Republic Bank, and Credit Suisse, points to the continuing need for financial institutions to price liquidity risk properly and for financial systems to find alternative sources of liquidity in times of dire need. Central bank digital currencies (CBDCs), fiat-backed stablecoins (fsCOINs), and synthetic central bank digital currencies (sCBDCs) could offer improvements, but each comes with its own set of problems and conditions. Prior research reaches conflicting conclusions about the effect that each of these three financial assets has on systemic bank liquidity and fails to adequately address their net benefits relative to each other. This paper addresses these issues, including those connected to financial disintermediation, bank runs, outsourcing central bank activities, financial interoperability, cash equivalents, maturity transformation, required reserves, and changes in nations’ monetary bases. After addressing the strengths and weaknesses of fsCOINs and CBDCs, we conclude that sCBDCs provide the most significant net liquidity benefits when risks and returns are considered.

Keywords: bank runs; cash equivalents; central bank digital currencies; disintermediation; interoperability; systemic liquidity; financial institution liquidity; monetary base; outsourcing; stablecoins; synthetic central bank digital currencies (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2024
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