According to a report published by Bank of America on March 31st, CBDCs (Central bank digital currency) may encourage central bank stimulus in the form of money drops, resulting in higher inflation.
The benefits of CBDCs, according to the Bank of America study “Digital Love: Central Bank Digital Currencies,” include the ability to increase the speed of domestic and foreign payment systems while lowering costs.
The bank’s analysts wrote, “CBDCs might improve the future transmission of monetary and fiscal stimulus.”
Furthermore, the research shows how countries’ adoption of CBDCs may inadvertently increase demand for the largest cryptocurrency as an inflation hedge.
According to the study, these benefits could make it easier for governments and central banks to allocate stimulus funds.
“CBDCs represent the next frontier for central bank stimulus, potentially acting as a potent conduit for policies such as stimulus checks, emergency lending programs, UBI (universal basic income), inducing a more powerful, directed ‘money drop.’ The evolution of central bank digital currencies is likely to increase inflation expectations, boosting the case for inflation assets in the 2020s,” writes BoA.
Additionally, “The existence of a CBDC would likely have allowed simpler designs and facilitated the targeted extension of credit. In cooperation with fiscal authorities, the stimulus could be surgically tailored. In contrast to broad fiscal measures like the recent $1,400 stimulus checks issued by the U.S. Treasury, governments could credit smaller amounts to specific populations or industries to achieve their policy aims,” as cited in the report.
The study does, however, include a list of possible disadvantages. For example, they wrote that “Governments may be able to gain access to personal spending data”, which can be considered a privacy risk.