Digital dollar can preserve dollar supremacy, says Bank of America

Bank of America (BofA) said in a report that a central bank digital currency (CBDC) of the United States is an “inevitable evolution”.

Furthermore, it stated that a digital dollar could be launched sometime between 2025 and 2030 without impacting the dollar’s supremacy.

As reported by Bloomberg, in the report titled “US CBDC: First Step on a Long Journey”, BofA said that a US CBDC would be different from existing digital money available to the general public.

That’s because it would be a liability of the Federal Reserve. Consequently, this would mean no credit or liquidity risk for the digital currency.

Bank of America about digital dollar

According to strategists Alkesh Shah and Andrew Moss, the US would benefit from the release of a CBDC. After all, it could keep the dollar as the world’s reserve currency. However, they did not detail how a digital currency would do this.

“Potential benefits include preserving the dollar’s status as the world’s reserve currency, improving cross-border payments (average cost to remit $200 from the US was 5.4% of the transaction value in Q2 21); increase financial inclusion (~5% of households were unbanked in 2019); and leverage new use cases provided by a digital currency.”

On the other hand, CBDC would also come with some risks. This includes increased liquidity risk for the financial system if commercial bank deposits are converted into a CBDC. In other words, there could be a cash shortage if a bank’s customers suddenly turned their money digital.

BofA also noted that a CBDC could decrease “the effectiveness of monetary policy implementation”. That means it could change the way the Fed prints/injects money into the financial system to stimulate the economy.

A CBDC in the US would also need to have its identity verified to prevent crimes, BofA added.

Use of stablecoins

Finally, they said that “the adoption and use of stablecoin for payments is expected to increase significantly in the coming years.”

According to them, this will happen because more and more financial institutions are exploring crypto custody and trading solutions.

In addition, payment companies are incorporating blockchain technology into their platforms.