HomeNewsCBDCU.S. Federal Reserve Paper Examines Impact of CBDC on Dollar Dominance

U.S. Federal Reserve Paper Examines Impact of CBDC on Dollar Dominance

Date: 28 February, 2024

In a recent paper released by the U.S. Federal Reserve, researchers delve into the potential effects of a central bank digital currency (CBDC) on the international standing of the U.S. dollar. Contrary to widespread speculation, the paper concludes that the introduction of a CBDC is unlikely to significantly impact the dominance of the dollar unless major geopolitical changes occur independently of CBDC issuance.

The study underscores that the appeal of the U.S. dollar is deeply rooted in non-technological factors such as a stable government, robust judiciary, legal property protections, a thriving economy, liquid capital markets, and the ample availability of Treasuries for investment. Statistical data spanning two decades until 2019 reveals the dollar’s overwhelming dominance, with the only exception being Europe, where the euro is preferred for 66% of cross-border transactions.

Impact of CBDC on Dollar

The paper suggests that the advantages anticipated with introducing a CBDC can be achieved through ongoing improvements in payment systems. It emphasizes that many cross-border challenges stem from policy decisions rather than technological limitations, citing examples such as restrictions on foreign banks’ access to central bank accounts.

While the U.S. can control the design of its CBDC and other policy decisions, there are areas beyond its influence, including the rise of foreign stablecoins denominated in dollars or other currencies. The paper acknowledges the potential impact of stablecoins on CBDC adoption, highlighting the need for better interoperability between payment systems to enhance the dollar’s role in international transactions.

Foreign activities, such as introducing CBDCs by other countries, are viewed with some skepticism in the paper. It suggests that for foreign CBDCs to compete with the dollar, they would need to replicate the fundamental factors that make the U.S. currency attractive, rather than merely introducing a CBDC

Conclusion( Impact of CBDC on Dollar)

As the debate over a retail CBDC unfolds, challenges in gaining approval from Congress are anticipated. Opposition from Republicans, citing concerns about privacy and self-directed control, poses a hurdle, while some Democrats express reservations about potential impacts on banks, particularly in lending. Recent anti-CBDC legislation introduced by Republicans at both state and federal levels further complicates the path toward CBDC implementation.

References:

https://www.ledgerinsights.com/cbdc-dollar-dominance-federal-reserve/

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