For decades, the US dollar has been the undisputed global reserve currency, but that could change. Since 2014, China has been quietly working on its own central bank digital currency (CBDC), which is an alternate electronic version of its local yuan. And this year, the People’s Bank of China launched a real-world beta test of its CBDC in more than 30 major cities to eliminate bugs. In June, he even organized a lottery to distribute digital wallets of 200 yuan (about $ 31) to 200,000 citizens in order to boost adoption.
In recent years, several other countries have also launched small CBDC tests, including the e-krona in Sweden and the e-peso in Uruguay. Other countries currently exploring their own CBDC projects include France, Korea, Russia, Canada, Brazil and South Africa. However, nothing has reached the scale of CBDC’s deployment in China.
A US Treasury Department adviser, who spoke to me exclusively on condition of anonymity, said the Chinese aspirations of the CBDC are an attempt to become the world’s future digital currency. “We now know that the Chinese CBDC is much less ‘progressive’ than initially expected,” the source explains. “Instead of a new CBDC, it’s more of a digitized yuan. We’re pretty sure China’s goal with the ECNY (digital yuan) is to attack the dollar’s status in as a global reserve currency, but we don’t know how effective it is. I will do it in its current state. ”
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What China’s launch means for a digital U.S. dollar
U.S. Federal Reserve Chairman Jerome Powell was also not worried at a September 22 press conference when asked if he had any concerns about China’s lead in this process. global race for digital currency. “I think it’s important that we come to a place where we can make an informed decision about it and do it quickly,” said Powell. “I don’t think we’re late. It’s more important to do it right than to do it quickly. We are the world’s reserve currency. And I think we’re in a good position to do that analysis and make that decision. “
Powell went on to say that the Fed is working on a document that will inform the decision to launch a U.S. CBDC, which could be ready in the coming weeks. “We plan to release a discussion paper soon that will serve as the basis for a period of public engagement,” said Powell. He added that “The ultimate test [that] will apply when evaluating a central bank digital currency and other digital innovations: are there clear and tangible benefits that outweigh the costs and risks? “
Supporters of a Fed-fueled digital dollar say these benefits include cheaper, faster financial transactions and faster distribution of federal funds like Social Security benefits or aid like stimulus checks. According to the FDIC’s How America Banks survey in 2019, there are approximately 7.1 million unbanked households in America. Thus, the digital dollar could also be a means of enhancing economic equality for these people, most of whom have mobile devices, which would be a primary access tool to the CBDC.
However, critics note that some of the so-called strengths of the CBDCs are also major weaknesses. CBDCs are not encrypted, so they are not anonymous, and will likely come from a government-run blockchain. The movement of digital dollars would be traceable. So while it would help curb terrorist financing and eliminate money laundering, officials would have explicit details about every transaction you make.
Potentially, US federal and state tax agencies could track taxable transactions and secure automatic payments at their discretion and without notice. Additionally, depending on the ruling political party, the government could potentially politicize payments from the CBDC, for example by blocking payments to charities or religious organizations – or by blocking the use of the CBDC for certain products such as birth control or bullets.
What’s the next step for an American CBDC?
Despite these challenges, if the United States is launching its own CBDC, it has several advantages over anything currently available or in the works. Not only is the US dollar the reigning global reserve currency, but its monetary value has a universal cache among countries and individuals, which would aid in utilizing its CBDC. And if the United States wanted to promote the rapid adoption of its electronic dollars, it could decide to issue foreign aid only in the American CBDC. Such a power play could ensure global adoption as the United States provides aid to more than 200 countries around the world, according to the Council on Foreign Relations.
It’s hard to say for sure if and when a US CBDC might be launched, but it’s even harder to imagine the world’s largest economy and the world’s reserve currency on the sidelines of the CBDC.
“As far as the Fed is concerned,” the anonymous Treasury source said, “they have conducted a study and are about to publish research on the feasibility of a US CBDC or a digitized dollar, but I am personally optimistic about a US CBDC within the 18-24 month time frame. “
Whatever the future of an American CBDC, it will be interesting to see what happens next and what impact it will have on the cryptocurrency world as a whole.