The global currency market is being disrupted by digital technology. Consumers worldwide are gravitating to cryptocurrencies, ushering in a new era of international finance that is more decentralized. Some governments are taking notice and working quickly to build central bank digital currencies (CBDCs), digital versions of fiat currencies based on blockchain technology. For the time being, the U.S. dollar reigns supreme. Still, unless officials in the United States make substantial efforts to adapt to a more digital financial system, the U.S. risks losing the economic and geopolitical advantages of the dollar’s hegemony. However, is a United States Central Bank Digital Currency required for that?
Fed Governor Lael Brainard, a Vice-Chair for the Federal Reserve, said before the Committee on Financial Services that the U.S. was at risk of falling behind in the race for the future of money. She’s probably right, based on the number of countries adopting fiat-based digital assets. The U.S. government has a 40-page discussion paper about it which can be found (HERE)
In her speech, Lael Brainard said.
With technology driving profound change, it is important we prepare for the financial system of the future and not limit our thinking to the financial system of today. No decision has been made about whether a U.S. central bank digital currency (CBDC) will be a part of that future, but it is important to undertake the necessary work to inform any such decision and to be ready to move forward should the need arise.
There has been explosive growth in an emergent digital financial system built around new digital assets and facilitated by crypto-asset platforms and stable coins as settlement assets. In recent weeks, two widely used stable coins have come under considerable pressure.
The stable coins Brainard is alluding to are Terra (LUNA) and UST, where UST is supposed to maintain a one-to-one peg to the dollar and LUNA is meant to absorb short-term volatility from UST. The one-year charts for LUNA and UST can be seen below.
These events underscore the need for clear regulatory guardrails to provide consumer and investor protection, protect financial stability, and ensure a level playing field for competition and innovation across the financial system.
She added further that,
The recent turmoil in crypto-financial markets makes clear that the actions we take now—whether on the regulatory framework or a digital dollar—should be robust to the future evolution of the financial system.
Increasing the amount of “regulatory guardrails” either from the government or the Fed is natural reflex of the banking-public partnership that can been seen through the history of money and banking. The arguments in this case are very similar to those in the late nineteenth century and very early twentieth century during the era known for Wildcat banking. An era that was ended with the passage of the Federal Reserve act in 1913.
She pointed out that central bank digital currency (CBDC), a digital representation of a country’s sovereign currency, may exist alongside and supplement stable coinage.
“A CBDC would be attractive to risk-averse users during times of stress.” She said. “The dollar is the most widely used currency in international payments and investments, which benefits the United States by reducing transaction and borrowing costs for U.S. households, businesses, and government. In future states where other major foreign currencies are issued in CBDC form, it is prudent to consider how the potential absence or presence of a U.S. central bank digital dollar could affect the use of the dollar in global payments.”
According to the Atlantic Council’s CBDC tracker (https://www.atlanticcouncil.org/cbdctracker/) , more than 100 countries, including the Fed, are researching, or piloting CBDCs, only a few have issued them so far. The Federal Reserve and the Treasury Department in the United States initially took a cautious approach to the establishment of a digital dollar at first.
The Federal Reserve’s first report on the subject, published earlier this year, did not take a firm stance on the creation of a digital currency and instead suggested that more research be conducted. The recent White House executive order on digital currencies did not specify a specific strategy; instead, it directed federal agencies to investigate the risks and benefits of digital currencies for consumer protection, financial stability, illicit activity, U.S. competitiveness, financial inclusion, and innovation.
The argument of whether or not the United States should have a Central Bank Digital Currency is an interesting one. On one hand, you must keep the privacy of the citizens and the possibility of future malicious intent in mind. On the other hand, it would be a significant hit to the economic standard of living of the Untied States if the Dollar lost reserve currency status and power. Now, enforcing that as a CBDC, may or may not be necessary. As with everything, understanding the nuances of how such a currency would be structured and utilized can change the outcome drastically. As Thomas Sowell says, “There are no solutions, only trade-offs.”
The real question is whether or not losing the Dollars hegemony on the global stage is worth the possible future tyranny of the finances of individuals. Especially since in the discussion paper it is explicitly stated that the possible CBDC could have limits on how much and how fast and individual can have of it. Even then, it must be noted whether or not individuals are allowed to use other forms of currency and the CBDC is just auxiliary to the current system, but through a deep study of history, the probability of that seems rather low. Everything is a game of probabilities, and it is left to the reader to access those probabilities for themselves.
For more on the banking system
https://jamesdforsythe.com/category/monetary-system/banking-system/
