In their January 2022 report, ‘Money and Payments The US Dollar in the Age of Digital Transformation,’ the Federal Reserve posed this question. While monetary policy should not and cannot be dictated by decisions made by other sovereign states, there will always be a question of competitive advantages. The US Dollar is currently the global reserve currency. If the United States fails to act, and if China moves forward with their own CBDC, some question whether that might change.
The Chinese have been testing their own CBDC for the past year, and there is no denying that as global powers go, they have the most advanced digital currency program. However, to say that the US Dollar will be replaced by a time advantage of a year is massively short-sighted.
The Chinese program has been roundly criticized for authoritarian concerns, which makes such a transition extremely unlikely. However, if the United States were to indefinitely stay on the sidelines and oppose offering a CBDC, would the needle move? To say that the topic is anything less than a national security concern would be foolish.
In the same report, the Fed said that it “will only take further steps toward developing a CBDC if research points to benefits for households, businesses and the economy overall that exceed the downside risks, and indicates that CBDC is superior to alternative methods. Furthermore, the Federal Reserve would only pursue a CBDC in the context of broad public and cross-governmental support.”
It is generally accepted by many in the industry that blockchain technology is a truly transformative technology that will completely upend the way that we interact with our financial system. It isn’t overly bold to hypothesize that research will point to benefits that exceed the risks.
The secondary question is how the Fed defines broad public support. I’ve said for some time that the educational aspect of a CBDC will be as burdensome as the technological infrastructure required. Many in the public will understand the benefits when they’re presented with themhowever, there will always be a segment of the economy that is resistant to such changes.
While the United States is behind China in terms of development, they are also behind in terms of public education, and that shouldn’t be ignored. As time goes on, without significant action on the part of the Fed, the country will fall further behind. It is fortunate in that it has a populace that has significant exposure to technology, which will aid in adoption. However, if you consider the population of the EU, a digital Euro will have many of the same advantages in that arena.
Many right now when confronted with this question first relate an American CBDC with that of China’s. They will point out that China is moving forwardand most who are serious about the subject, will point out the flaws with China’s CBDC being widely accepted internationally. However, that does not mean that the US Dollar couldn’t eventually face pressure from the Euro, should the Fed completely fail to act.
The Euro currently is the second most commonly used currency in foreign exchange reserves. When the Fed and the rest of our policy thinkers consider the question posed, it is critical to look at the question from all sides and in a futuristic way. Digital currencies will not be going away.