The US is falling behind in the race to develop and implement a central bank digital currency (CBDC). It’s been the case for several years that the Fed has been careful to analyze the pros and cons of a digital currency and even slower to develop a workable version that’s ready for implementation.
Why this is significant: On one hand, if the US falls too far behind in the global digital currency race, other CBDCs could pose serious competition to the greenback, threatening the dollar’s world reserve currency status. If it becomes too slow and inefficient to use the dollar for cross-border payments, then countries may favor other CBDC alternatives. On the other hand, money that’s 100% issued and monitored by and banked at a central bank could pose serious threats to financial privacy and freedom of savings (i.e., a central bank can impose negative interest rates, forcing people to spend). Not only would this render a large segment of the banking industry obsolete, but “private money” comprising around 95% of all money flowing through or deposited within banks would be converted to “public money” which, of course, smacks of Socialism.
Our thought bubble: Is it worth maintaining the dollar’s world reserve currency status if it means sacrificing citizens’ financial privacy and converting your private funds to something that looks suspiciously like government money?
A U.S. central bank digital currency (CBDC) could help maintain the U.S. dollar's status as the world's reserve currency, said Federal Reserve Chair Jerome Powell.
The development of CBDCs by other countries could pose competition to the U.S. dollar, Powell said in introductory remarks at the "International Roles of the U.S. Dollar" conference, which the central bank held.
"Looking forward, rapid changes are taking place in the global monetary system that may affect the international role of the dollar in the future. Most major economies already have or are in the process of developing instant, 24/7 payments," Powell said. "As the Fed's white paper on this topic notes, a U.S. CBDC could also potentially help maintain the dollar's international standing."
Powell also added that the Fed started looking into developing a CBDC after tremendous growth in crypto-assets and stablecoins. The goal is to "improve on an already safe and efficient domestic payments system," he said.
The Fed recently wrapped up its four-month consultation with the public about a digital dollar. "As we consider feedback … we will be thinking not just about the current state of the world, but also how the global financial system might evolve over the next 5 to 10 years," according to Powell.
The U.S. is a step behind on CBDCs, with ten countries having already launched their own versions and another 15 in pilot stages, according to the Atlantic Council's Central Bank Digital Currency Tracker.
"105 countries, representing over 95 percent of global GDP, are exploring a CBDC," the tracker said. "In May 2020, only 35 countries were considering a CBDC. A new high of 50 countries are in an advanced phase of exploration (development, pilot, or launch)."
Powell also mentioned inflation in his speech, stating that the U.S. central bank is "acutely focused" on returning inflation to the 2% objective. "The Fed's commitment to both our dual mandate and financial stability encourages the international community to hold and use dollars," he said.
He pointed out that the Fed's commitment to price stability helps to maintain the confidence in the dollar as a store of value.
More specifically, on the U.S. dollar, Powell touted the currency as being at the center of the international financial and monetary system since World War II. "It is the world's reserve currency and the most widely used for payments and investments," he said.
One of the challenges of being the world's reserve currency is financial stability risks that come from the widespread use of the dollar around the world, which can "materially affect households, businesses, and markets."
Powell spoke at the conference Friday just two days after the Fed raised rates by 75 basis points — the biggest rate increase since 1994.
To get Powell’s take on what's to come at the Fed's July meeting, click here.