In a new report, the European Parliament's Economic and Monetary Affairs Committee has stated that central bank digital currencies (CBDCs) could lead to a more stable financial system.

According to the report, cryptocurrencies such as bitcoin cannot replace traditional currencies to any significant degree. The authors believe that it would be “prohibitively expensive” to conduct even a moderate share of the transactions currently being handled via traditional currencies through cryptocurrencies.

The report further noted that crypto and related assets are now primarily used as a vehicle for financial speculation, rather than as a medium of exchange.

With regard to CBDCs, the authors believe that their impact could disruptive, adding that it might not necessarily be a bad thing. The report said that the existing fractional reserve banking system would be challenged at its core if market participants start holding liquidity in the new digital currency accounts instead of bank deposits.

“To avoid recurrent instability of the banking system, commercial banks would need to come up with more reliable funding sources than deposits. As the fractional reserve character of the current banking system can be a major source of instability, such a disruptive change is not necessarily a bad development, but could finally pave the way for a more stable financial system,” it added.

While the report supports the issuance of CBDCs, Tony Richards, head of the payments policy department of the Reserve Bank of Australia (RBA) and Geoff Bascand, governor of the Reserve Bank of New Zealand, have ruled out any such possibility citing financial stability concerns.