US CBDCs Could Help Maintain Dollar’s International Status
Federal Reserve Chairman Jerome Powell has said that a US CBDC (central bank digital currency) “could help maintain the international position of the dollar.” Many other countries already have their own CBDC. With the rise of crypto in popular culture, digital money seems inevitable. what does this mean? Let’s look at the potential benefits and consequences of a CBDC on crypto and the dollar.
What are Central Bank Digital Currencies?
CBDCs are fiat currencies that exist only in digital form. Fiat money is a type of currency that is established as money by government regulation or law. For example, the dollar is a type of fiat currency because it has no intrinsic value; Its value comes from being declared legal tender by the US government and, therefore, can be used to settle debts.
This is not always the case. In the past, gold stored by governments supported the value of currencies around the world. However, the US last dropped the gold standard in 1971 under President Richard Nixon—FDR had previously done it in 1933. These days the value of the dollar is tied to the international economic status and prestige of the United States.
countries with digital currencies
Countries around the world are working on developing CBDCs. China was the first country to launch a CBDC pilot project. This may explain why Jerome Powell and the US government are considering the development of CBDCs to remain competitive. China’s digital yuan uses a government-issued digital wallet app that allows users to send money from their accounts to government-approved distributors. The Bahamas and Nigeria have also launched their own CBDCs, and several other countries are working on CBDC projects. According to the International Monetary Fund, more than 100 countries are considering a CBDC.
CBDC vs Current Digital Currency
Although there are some similarities between CBDC and digital fiat currency, there are significant differences. Technically a CBDC will also be a fiat currency as the Fed will support both. Nevertheless, CBDCs will operate differently than digital currency banks currently in use. The digital money we see in our banking applications refers to money stored by banks.
For example, when your account goes into overdraft, it shows a negative balance. In practical terms, this means that the bank has used the cash with it to meet a charge that your account cannot cover. The bank still oversees and manages all transactions with our current digital currency. You can also convert the dollar amount you see in your banking app to cash. You will not be able to do this with a CBDC. CBDCs, on the other hand, are closer to stablecoins – even if Jerome Powell dislikes that comparison.
The Federal Reserve will likely issue a US CBDC directly, which means they will keep track of that ledger. Assuming that a CBDC will run on a blockchain ledger is not far-fetched and will likely shake the banking sector; Like cryptocurrency, CBDCs enable users to transfer funds directly to each other without banks acting as intermediaries.
The Federal Reserve has the power to print money, and issuing digital dollars would be part of that system. This means that only a certain amount of digital dollars will be in circulation at the discretion of the Fed. The digital dollar will also be subject to inflation as the dollar expands.
Are CBDC Cryptocurrencies?
CBDC is digital currency. Cryptocurrencies are digital money. So, are they the same? off course not. The cryptocurrency, which began with the creation of bitcoin in 2009, has become an ongoing experiment in decentralized finance. This means that there is no single institution to look after them.
While we have thousands of cryptocurrencies today, the theory behind them is that they are decentralized financial systems. Their value is not directly tied to any particular government, so they act as an external exchange network. This is made possible through blockchain technology, which acts as its ledger. Blockchain uses complex cryptography to verify transactions against nodes throughout the network.
Although, in theory, it is understandable that a CBDC would use blockchain technology, there is the issue of scalability. Crypto networks are notorious for fluctuating – often costly – transaction fees. High traffic on the network slows down transactions and makes them more expensive.
Only a relatively small population has adopted cryptocurrencies. For example, China’s digital yuan is not dependent solely on blockchain because authorities fear the technology may not handle the expected transaction volume. So, while CBDCs and cryptocurrencies function similarly in principle, they are philosophically at odds.
What will a US CBDC mean for crypto?
A US government-issued digital currency could have massive implications for crypto. Before that happens, though, there are a few things to work on. First, there would be the issue of distribution. The Federal Reserve will have to establish how much of the money shown in banks’ digital ledgers that customers can convert into US CBDCs. Or, they will need to determine how many digital dollars will be issued and how they will distribute them to the population.
Then there is the issue of the ledger who will oversee all CBDC transactions – and whether the ledger can handle the daily transaction volume across the US. Economists suggested that a US CBDC would operate on a distributed ledger rather than a blockchain. The government then has to establish whether the population can access CBDCs and crypto.
China specifically banned all cryptocurrencies when it launched its CDBC project. Will America follow suit? While many crypto exchanges require proof of identity, the crypto community maintains a degree of pseudo-anonymity. Depending on the US government’s stance on crypto after the launch of the digital dollar, the two could become even more entangled. For now, the Federal Reserve suggests that CBDCs also maintain some form of anonymity.
The other option would be if the US government chooses to launch a digital dollar and regulate crypto under the SEC or CFTC. This option would see the two coexist as parallel markets, but the nature of that relationship would be subject to any regulations imposed by government agencies.
