Central banks that don’t issue their own digital currency will face a dropoff in demand for their physical currency, with the US dollar and euro especially at risk of losing their leading global role, Bank of America analysts have warned.
The widespread adoption and usage of central bank digital currencies, or CBDCs, is inevitable, they said in a research note last week. Such CBDCs would be used as digital cash, rather than a store of value, and could also play a part in monetary policy toolkits, they argued.
Not having a CBDC creates the risk of losing out to countries that do have one, as well as to private actors or companies launching tokens, the Bank of America strategists believe. Much of this is linked to the surge in popularity in private, blockchain-based cryptocurrencies such as bitcoin.
The usefulness of digital cash could prompt people to adopt a CBDC from a foreign institution to carry out transactions, if their own central bank fails to act.
“In some cases, countries without CBDCs could be ‘dollarized’ as their citizens start using another country’s CBDC, and potentially see the value of their currency drop sharply,” the analysts said in the Wednesday note.
That could have an impact on the status of countries in the global financial system. If the US and EU don’t digitize their currencies, then the dollar risks losing its dominance and the euro’s role in global transactions and in reserves, the strategists argued.