What are the prospects for the US digital currency?

It is difficult to make progress in introducing the central bank’s digital currency when those in charge of the monetary system cannot agree. Is time running out for the US version of CBDC?

CBDC has its advantages

An important speech by Chris Waller, a member of the board of the Federal Reserve System, emphasized that the adoption of the digital currency of the US central bank is facing a difficult path. This was a significant departure from recent statements by Fed Chairman Jerome Powell, who said the CBDC could replace stablecoins, as well as Fed Governor Lael Brainard, who argued that dollar dominance required the Federal Reserve to accelerate the introduction of the US digital currency. A forthcoming Fed research paper outlines the benefits and risks of the CBDC. However, as Waller’s skepticism suggests, the Fed may take longer to decide.

The CBDC has its benefits for the public. The Federal Reserve issues “excess reserves”, which pay interest only to the banks holding these reserves. The CBDC provides ordinary people with direct access to holding excess reserves as a risk-free digital asset at an interest rate that is higher than ordinary deposits. A year ago, the Office of the Comptroller of the Currency (OCC), a regulator of commercial banks, decided to allow financial institutions to accept crypto assets as deposits. The CBDC could be the next step in this process, as banks have widely adopted digital banking technology.

Reserve currency

More than 80% of the world’s central banks are now researching digital currencies. In the case of the People’s Bank of China, a pilot version of the digital yuan is currently being tested across the country. The European Central Bank and the Bank of England are also continuing to research and develop the CBDC due to significant changes in consumer behavior when paying by cash.

If the Fed lags behind, the digital euro, the pound and even the yuan could be a major competitor in the fight for reserve currency status, as investors’ capital flows will face fewer obstacles in a digital payment system than in a system covered by financial assets such as government bonds.

For crypto markets, the digital dollar could be a real revolution. The US CBDC issue will change the settlement, valuation, trading and liquidity of US dollar-denominated securities. The USD in digital form could become a significant competitor and could affect the international money supply and capital flows, which in turn may affect expectations about interest rates, commodities and stocks.

Politics around digital currencies

The launch of the CBDC in the United States will be subject to congressional review. The current bill on infrastructure, which was abstained in the Senate’s procedural vote, is a good example of what political problems can arise around digital currencies. Republicans have proposed a regulatory review of the cryptocurrency industry, while Democrats are calling for increased tax compliance for cryptocurrency intermediaries. Both the Democratic and Republican senators are blocking the “broker” amendment, which would prevent software developers and transaction verifiers from re-reporting to the tax office, a strong sign that crypto is a hot political issue.

Conclusion

The Federal Reserve would probably not have issued a CBDC without Congressional legislation overseeing the US crypto industry, but there are other factors at stake. The Fed’s research paper on the US CBDC is approaching.