March 27, 2024
Fed Warns Foreign CBDCs Threaten Dollar's Dominance
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Fed Warns Foreign CBDCs Threaten Dollar’s Dominance

The Board of Governors of the U.S. Federal Reserve System has released a research paper examining the potential development of a central bank digital currency (CBDC) to compete with unnamed foreign powers. In 2021, Federal Reserve chair Jerome Powell emphasized the U.S. government’s “very high priority” for a U.S. CBDC.

CBDCs, government-controlled digital currencies, are debated for their impact on the dollar’s global standing. Proponents argue it would strengthen the dollar, while detractors express concerns about centralization, privacy invasion, and asset freezing by U.S. authorities.

In a recent paper, senior economic analysts from the Fed assessed the implications of a U.S. CBDC on the dollar’s role in international payments. They noted that “over 90% of central banks are exploring CBDCs,” the Fed is also evaluating the “implications of, and options for, introducing a CBDC.”

The primary concern centers around the potential competitiveness of the U.S. dollar against foreign CBDCs if the U.S. does not issue its own. The paper suggests that a “large and stable foreign CBDC” outside U.S. jurisdiction may not significantly impact the dollar’s status as a “unit of account” or “a store of value.” However, it raises the possibility of the dollar losing ground in international transactions if a foreign CBDC gains prominence.

“Depending on other CBDCs’ (or foreign currency-denominated stablecoins’) design features, there is some potential for the erosion of the dollar’s role as the medium of exchange if a U.S. CBDC is not issued or has unattractive design features.”

The debate over CBDCs has sparked disagreement among U.S. politicians. Former President Donald Trump, a 2024 presidential candidate, vowed to oppose CBDC production if elected. In line with this sentiment, five U.S. senators introduced a bill to ban CBDCs in the country.

A May 2023 poll indicated that only 16% of surveyed individuals in the U.S. would support a CBDC. As the U.S. explores the potential introduction of a CBDC, concerns and differing viewpoints continue to shape the ongoing dialogue around the digitalization of currency and its potential impact on the U.S. dollar’s global standing.

Image by rawpixel.com on Freepik

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