November 15, 2023 at 11:12 GMTModified date: November 15, 2023 at 11:13 GMT
November 15, 2023 at 11:12 GMT

US CBDCs to take a while as it awaits Congressional support

A digital dollar might be unlikely in the near term, according to Bank of America’s (BAC) Monday report.

US CBDCs to take a while as it awaits Congressional support

Central bank digital currencies (CBDCs) are expected to soon become a thing of the present as countries around the world have taken to exploring the same. However, a digital dollar might be unlikely in the near term, according to Bank of America’s (BAC) Monday report.

Analysts led by Alkesh Shah wrote: “The Federal Reserve (Fed) continues to pilot CBDCs but has not committed to a CBDC and will not issue one without executive branch and Congressional support.”

The team is currently working on perfecting the design and issuance approach for the CBDC. According to them, the benefits and risks of these currencies depend on the approach taken.

The authors said that they expected CBDCs to provide a “more efficient and less costly payment system for cross-border and domestic payments”. It therefore needs to be developed as a tool for monetary policy implementation and improved financial inclusion.

However, the existence of CBDCs might also drive competition with bank deposits, more frequent bank runs, loss of monetary sovereignty and tensions among countries globally, said the bank.

Nevertheless, BOC reiterated its view that CBDCs have the “potential to revolutionise global financial systems”. By leveraging the private sector and beneficiaries to emerge across all phases of CBDC implementation, central banks and governments will be able to propel digital asset innovation.

Central bank digital currencies are a form of digital currency issued by a country’s central bank. They are similar to cryptocurrencies, except that their value is fixed by the central bank and equivalent to the country’s fiat currency.

Central banks, which represent about 67% of countries around the world and 98% of global gross domestic product (GDP), are actively exploring CBDCs to include it in their infrastructure. The BOC report also revealed that about 33% of them are already in advanced stages of their process.

According to a survey carried out by the Bank for International Settlements (BIS), around 15 retail CBDCs could be in circulation across the world by the end of this decade. Of the 86 central banks surveyed, 93% are now undertaking CBDC work. This includes major jurisdictions such as India, the UK and European Union all seriously exploring issuing a digital version of their fiat currencies.

Just earlier this month, the head of BIS, Agustín Carstens, emphasised how he believed CBDCs to play a key role in the new digital age. He called them ‘central’ to innovating financial systems in a speech that was given at the conference “Securing the future monetary system: cyber security for central bank digital currencies”, in Basel, Switzerland.

While it is seen as pivotal in the transformation of the financial system, Carstens also noted security and innovation as cornerstones for the development of these digital currencies:

“​​To fulfil this role, CBDCs will need to meet several requirements, such as a user-friendly and versatile technical design and a robust legal framework. Above all, they must be secure – and be seen to be so.”

In the other part of the world, the European Central Bank (ECB) is fast progressing with the digital euro project. It has transitioned into a preparation phase that could lead to a “potential future decision” to officially introduce the CBDC. The bank is now embarking on another two-year preparation period, aiming to establish a comprehensive digital euro guideline, choose service providers for the CBDC platform, and undergo additional trials.

The month of October also saw South Korea announcing a CBDC pilot program and the Reserve Bank of Australia taking an open stance on the same, including CBDCs in its future of money work program.