Welcome to the world of central bank digital currency, or CBDC, where big countries like China and small countries like the Bahamas are trying to make their presence felt. It’s a world where 86% of the world’s central banks are trying to create digital currencies. Almost 60% of them are working on the concept and 14% have already set up a pilot program.
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CBDC: a global perspective
A CBDC is the digital version of a national currency that can be exchanged around the world. Unlike a national currency, you can keep a digital currency on your smartphone to buy whatever you want.
Five countries have already introduced their digital currency. The Atlantic Council estimates that around 81 countries (contributing 90% of global GDP) have already started researching digital currency. And that’s just the beginning.
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According to a Bank for International Settlements (BIS) survey released in January, there will be a digital currency boom over the next few years. According to the BIS, countries representing one-fifth of the world’s population will soon launch a digital currency.
China currently leads the championship. They have already completed more than $ 5 billion in transactions with its CBDC, the digital yuan. Some people are concerned that this will help China gain an advantage over the status of the US dollar.
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But how do you use CBDCs? Well there are different ways. They can buy basic necessities, such as food and medical supplies. However, it is best if the digital currency is not used to purchase alcohol or cigarettes. Digital currency can also be useful during a pandemic. It can provide government assistance quickly through digital wallets. It can also help the government put an end to malpractice.
Is America Ready to Enter the World of the CBDC?
The US Federal Reserve remains skeptical of the effectiveness of central bank digital currencies. They are still years away from developing their own digital currency. Meanwhile, according to a Bank of America report, the digital currency would keep the US dollar “very competitive … against other currencies.”
The United States House Committee on Financial Services held a hearing on the pros and cons of central bank digital currencies. Many who attended the hearing, including Julia Coronado of MacroPolicy Perspectives, expressed their opinion that the United States needs to be more serious and take a leadership role in the CBDC.
China is already leading the way, and other countries are also making steady progress. If America continues its laid back attitude towards digital currency, it will lose the chance to decide the future of digital currency.
Possible reasons for the relaxed US attitude towards digital currency
One of the possible reasons America is not taking proactive steps on digital currency is that the US dollar still reigns supreme. But what America does not understand is that the CBDCs can withdraw the US dollar from their number one global reserve currency position in the future.
A digital currency would remove barriers for countries that directly conduct financial transactions with each other. They would no longer have to depend on the US dollar. One of the reasons the US dollar dominates the world is because it is a reserve currency. People use it for convenience. But with the emergence of digital currency, these people can make direct settlement between trading pairs.
Related: Chinese CBDC aims for domestic domination, does not beat the dollar
The US dollar is an integral part of US foreign policy. The federal government can exclude sanctioned countries from the dollar-based system.
Now it all depends on the United States. If the country does not introduce its own CBDC, it may not get much information about cross-border transactions in the future. If other countries use digital currencies for transactions, they wouldn’t need to use the Society for Worldwide Interbank Financial Telecommunication network, which America can oversee.
What can the United States do?
There is a downside to digital currency, and that is the lack of privacy. Many Americans may not like the fact that the government can easily monitor transactions made with digital money. The US government can play an important role in alleviating this concern. He can develop a digital currency which will not result in breach of privacy. According to Digital Dollar Project co-founder Chris Giancarlo:
“If this is to be the technology of the future, we want to make sure that the United States applies democratic values. “
Close inspection of the current scenario shows that digital currency is here to stay. Digital currency can help central banks coordinate directly with people. It is very useful in times of crisis.
Widespread use of digital currency can reduce operating costs for the global financial sector. It can become the most convenient way to do financial transactions and push us towards a cashless society.
Will that wipe out cash altogether? Well, it’s too early to predict because cash is still the most private form of money. Central banks do not recommend a complete elimination of liquidity.
Will it replace Bitcoin (BTC) or other cryptocurrencies? The fundamental difference between CBDCs and cryptocurrency is that the former is a digital government currency and the latter is a non-government digital currency. Currently, CBDCs are less likely to replace cryptocurrency, which is convenient for private transactions (although it is unregulated and vulnerable to hackers).
Then comes the next big question: What about America’s place in the world of CBDCs? The answer is simple. If America is still not ready for digital currency, it will remain on the sidelines. He will lose a chance to create a digital currency that is democratic and heavily focused on privacy. According to Michael Sung of the Fudan Fanhai Fintech Research Center in Shanghai: “You are going to witness a massive transformation of the international monetary system.
If this is true and digital currency is widely used, the value of the US dollar as a global currency will decline. If America acts wisely and develops digital currency, it can get an estimated 14 million unbanked American adults into the financial system.
The views, thoughts and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of TBEN.
Lyle Solomon is a senior lawyer for the Oak View Law Group in California, where he specializes in consumer bankruptcy. In addition to his extensive litigation experience, Solomon has written several articles on financial well-being.