Central Bank Digital Currencies and the Long-Term Advancement of Financial Stability

28 Pages Posted: 24 Sep 2019

See all articles by Jeremy Ney

Jeremy Ney

MIT Media Lab - Digital Currency Initiative

Nicolas Xuan-Yi Zhang

Massachusetts Institute of Technology (MIT) - Institute for Data, Systems, and Society (IDSS)

Date Written: September 1, 2019

Abstract

The United States financial system can be restructured by giving universal direct access to credit risk-free central bank money. In the 10 years since the financial crisis, technological advancements and regulatory tools have laid the foundation for Central Bank Digital Currencies to emerge as this economic resolution. Our paper analyzes similar economic cases and contends that introducing Central Bank Digital Currencies (CBDCs) can improve financial stability without degrading credit availability in the long term. We illustrate this by focusing on similar market shifts, namely in the U.S. student loan market and the New Zealand agribusiness sector. Our analysis showcases that by introducing CBDCs, market participants can subsequently remove certain market subsidies that promote poor risk practices and improper pricing. This subsidy to financial institutions is both explicit in the form of FDIC deposit insurance and implicit in the stipulation of taxpayer funded bailouts that materialized in 2008. We calculate the effect of introducing CBDCs by focusing on historical market examples when similar fundamental market shifts happened. Our conclusion is that CBDCs diminish credit availability within one-year, but this effect is ameliorated as financial stability improves in subsequent years. Accordingly, we recommend a roadmap for rolling out CBDCs in the least disruptive fashion.

Keywords: Central Bank Digital Currencies, Financial Stability, FDIC, CBDC

Suggested Citation

Ney, Jeremy and Xuan-Yi Zhang, Nicolas, Central Bank Digital Currencies and the Long-Term Advancement of Financial Stability (September 1, 2019). Available at SSRN: https://ssrn.com/abstract=3456753 or http://dx.doi.org/10.2139/ssrn.3456753

Jeremy Ney (Contact Author)

MIT Media Lab - Digital Currency Initiative ( email )

20 Ames St.
Cambridge, MA 02139-4307
United States

Nicolas Xuan-Yi Zhang

Massachusetts Institute of Technology (MIT) - Institute for Data, Systems, and Society (IDSS) ( email )

United States

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