Synthetic Central Bank Digital Currencies and Systemic Liquidity Risks
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...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
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MDPI AG
2024-02-01
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| Series: | International Journal of Financial Studies |
| Subjects: | |
| Online Access: | https://www.mdpi.com/2227-7072/12/1/19 |
| _version_ | 1797240741632671744 |
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| author | John E. Marthinsen Steven R. Gordon |
| author_facet | John E. Marthinsen Steven R. Gordon |
| author_sort | John E. Marthinsen |
| collection | DOAJ |
| description | 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. |
| first_indexed | 2024-04-24T18:12:15Z |
| format | Article |
| id | doaj.art-470c8e93314e49639091d751a69a6dab |
| institution | Directory Open Access Journal |
| issn | 2227-7072 |
| language | English |
| last_indexed | 2024-04-24T18:12:15Z |
| publishDate | 2024-02-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | International Journal of Financial Studies |
| spelling | doaj.art-470c8e93314e49639091d751a69a6dab2024-03-27T13:44:48ZengMDPI AGInternational Journal of Financial Studies2227-70722024-02-011211910.3390/ijfs12010019Synthetic Central Bank Digital Currencies and Systemic Liquidity RisksJohn E. Marthinsen0Steven R. Gordon1Economics Division, Babson College, Babson Park, MA 02457, USAOperations and Information Management Division, Babson College, Babson Park, MA 02457, USAThe 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.https://www.mdpi.com/2227-7072/12/1/19bank runscash equivalentscentral bank digital currenciesdisintermediationinteroperabilitysystemic liquidity |
| spellingShingle | John E. Marthinsen Steven R. Gordon Synthetic Central Bank Digital Currencies and Systemic Liquidity Risks International Journal of Financial Studies bank runs cash equivalents central bank digital currencies disintermediation interoperability systemic liquidity |
| title | Synthetic Central Bank Digital Currencies and Systemic Liquidity Risks |
| title_full | Synthetic Central Bank Digital Currencies and Systemic Liquidity Risks |
| title_fullStr | Synthetic Central Bank Digital Currencies and Systemic Liquidity Risks |
| title_full_unstemmed | Synthetic Central Bank Digital Currencies and Systemic Liquidity Risks |
| title_short | Synthetic Central Bank Digital Currencies and Systemic Liquidity Risks |
| title_sort | synthetic central bank digital currencies and systemic liquidity risks |
| topic | bank runs cash equivalents central bank digital currencies disintermediation interoperability systemic liquidity |
| url | https://www.mdpi.com/2227-7072/12/1/19 |
| work_keys_str_mv | AT johnemarthinsen syntheticcentralbankdigitalcurrenciesandsystemicliquidityrisks AT stevenrgordon syntheticcentralbankdigitalcurrenciesandsystemicliquidityrisks |