Digital Money and the Growing Divergence Between Nations
While other nations move ahead, the digital dollar remains in flux…
More efficient payment rails, managing monetary policy, cheaper and faster transactions, driving financial inclusion. The benefits of a central bank digital currency (CBDC) are plentiful for both individuals and businesses. Despite this, a U.S. digital dollar still appears a long way off.
Many countries are moving forward with digital versions of their sovereign currencies. Currently 105 countries, representing over 95% of the world’s global gross domestic product, are already exploring or have created a CBDC. In fact, over 50 countries are in advanced stages … yet according to the Atlantic Council, the United States is among the furthest behind.
While messaging from the U.S. Treasury seemed to indicate that plans for a CBDC were moving forward, recent comments by the Federal Reserve Chair were more pessimistic.
In September, Treasury Secretary Janet Yellen said one recommendation would be for the U.S. to “advance policy and technical work on a potential central bank digital currency, or CBDC, so that the United States is prepared if CBDC is determined to be in the national interest.”
However, two years ago, Federal Reserve Chair Jerome Powell stated that it is better “to get it right than be first.” And at the recent Banque de France conference on the “Opportunities and Challenges of the Tokenisation of Finance,” Powell reiterated this stance, saying that policymakers are carefully reviewing the costs and benefits of a U.S. CBDC, and that there is not an immediate need to proceed.
While the U.S. is still in the process of analyzing the benefits of a CBDC, China launched its digital currency earlier this year. According to the People’s Bank of China, some 260 million individuals and 4.5 million shops can now process the digital yuan. The e-CNY has been used in over 260 million transactions worth about 83 billion yuan ($12 billion) through the end of May, with an average transaction size of about 300 yuan. And the country is expanding the trials to its most populated regions before the end of the year.
Implications of Not Having a Digital Dollar
Simit Naik is the Director of Commercial & Strategy at Europe’s largest Blockchain Development company, nChain, and advises governments around the world in their journeys into digital assets, including central banks across Africa and Europe.
According to Naik, not having a CBDC impacts the ability of the U.S. Federal Reserve to effectively manage monetary and fiscal policy as they cannot execute immediate policy changes, address the zero-lower bound, facilitate direct transfers, or understand real-time monetary and economic data. Naik doesn’t believe the Fed “can wait on the side-lines for too much longer before the demand and necessity to deploy a digital form of central bank money becomes critical and for the Federal Reserve to become clearer about their role in digitisation of the U.S. Dollar.”
One of the main factors behind China’s digital yuan has been a desire for increased international trade. While the U.S. dollar remains by far the largest currency used in international transactions, one of the primary reasons China created a digital currency was to increase its share of cross-border payments. Along these lines, a recent proposal in Australia calls for Chinese banks operating in the country to begin using the digital yuan for cross-border payments.
CBDC Misconceptions
In its simplest terms, a CBDC is a digital form of central bank money, primarily accessed as notes and coins today. While some countries are seeing a decreased use of cash, it still plays a vital role in the global economy. But public perception around privacy abounds. Public comments solicited from the Fed’s white paper several stated privacy concerns, with legislation introduced that would prohibit a direct-to-consumer CBDC.
Indeed, at the Banque de France conference, Chair Powell stated before a digital dollar could be released, it would need to be “intermediated, privacy-protected, identity-verified, and interoperable.”
While privacy concerns are an issue for individuals, the threat of disintermediation is also worrying for commercial banks. Despite these worries, a wholesale CBDC would be similar to how central banks already provide digital money to banks—except it would include the use of digital ledger technology.
Naik even believes there is a role for both a credit backed digital dollar stablecoin and a CBDC to operate alongside one another as they play very different roles. “CBDCs should remain non-credit based and non-interest bearing, operating peer-to-peer, just like cash today, without requiring access to banking services. Stablecoins can provide credit services, like those offered by commercial banks, with access managed via accounts and services and being a key payment rail for real-time payment services and remittances.”
While the Fed may be in no rush, several legislators are concerned about the greenback’s position as the world’s reserve currency. The 21st Century Dollar Act (H.R. 3506) seeks to maintain the dollar’s status and includes the idea of a CBDC.
FedNow Launching Next Year
And what about FedNow? According U.S. central bankers, including Fed Governor Michelle Bowman, the forthcoming instant payment service will address many of the issues of not having a digital dollar. FedNow is expected to be launched in mid-2023, and would enable businesses and individuals to be able to send and receive instant payments conveniently and recipients will have full access to funds immediately. But does that keep the U.S. on par with other countries moving forward with their digital cash?
While FedNow solves issues around real-time payments, it leaves many questions unanswered. According to Naik, “the U.S. is going to continue to face challenges from the private sector, including stablecoins and crypto assets, over the next few years. This will have a significant impact on the ability of the Federal Reserve to maintain stability across the economy.”
This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in this article.
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