- 80% of the world’s central banks are toying with the idea of launching a state-backed digital currency
- G7 plans to coordinate discussions around Central Bank Digital Currency (CBDC) as the digital currency race intensifies following China’s commencement of DCEP trials
- The U.S. is determined to challenge China’s digital dominance as Congress held frequent hearings on the feasibility of a digital dollar
From mid-June to mid-July, U.S. Congress organized several hearings to discuss the feasibility of a digital dollar in order to stay on par with the vigorous competition on the CBDC front. The idea of a dollar-backed digital currency gained mainstream media attention in 2019 during the Libra congress hearings, whereby Facebook brought forth a new type of digital unit of account backed by a basket of currencies and commodities.
Earlier this year, a survey conducted by the Bank for International Settlement discovered that 80 percent of the world’s central banks are toying with the idea of launching a state-backed digital currency but only 10 percent have developed pilot projects to trial the nascent technology in everyday use. The Bank of Lithuania for instance, issued 24,000 blockchain-based digital tokens, dubbed LBCOINs in June 2020. LBCOINs can be exchanged directly with the central bank and on private blockchain networks. Its release puts Lithuania at the forefront of development of a fiat digital currency.
Similarly, China’s central bank has beaten most competitors to the punch on the CBDC front by launching pilots for its Digital Currency Electronic Payment (DCEP) system in at least two major cities. The trials are gradually gaining momentum, presenting a vision of DCEP transforming the status quo of Chinese monetary operation. A former vice president of a top Chinese bank asserts that the proliferation of digital currencies could replace fiat and enact monetary reform, as reported by The Global Times on August 2.
U.S policymakers are also warming to the idea of digitizing the national currency. However, the adoption process remains relatively slow, as evidenced by the increasing number of regulatory hurdles facing Libra after the House hearing last year.
Former CFTC Chairman, Christopher Giancarlo, a long-time crypto advocate, argued passionately for a digital dollar to be issued by the Federal Reserve. Since leaving the CFTC, Giancarlo has established the Digital Dollar Foundation, in cooperation with Accenture, to advance exploration of a tokenized U.S dollar that will ultimately “benefit the entire world”. The foundation published its first white paper in May 2020, detailing the imperative need for a digital dollar, which has the potential to support USD’s status as the world’s reserve currency. A digital dollar that emulates features of physical cash in an increasingly digital world could provide broader accessibility to central bank funds and payments, thereby decreasing transaction times and improving cost efficiencies.
The proposed digital dollar would maintain the current two-tiered distribution architecture in which commercial banks (and other regulated intermediaries with access to the Fed) would exchange reserves for digital dollars to be distributed to end users.
The Digital Dollar Project states that a new U.S. CBDC must perpetuate the core values of the United States through careful design of the infrastructure and meticulous implementation of privacy protection measures.
The white paper urges the U.S. government to thoroughly consider what role it will play in the global innovative process and to what degree its core values will be incorporated into the principle and design of the future system. The future calls for radical transformations of the monetary system to be on par with entities that are constantly evolving in both scale and programmability. The white paper envisions the future reserve currency to be a tokenized currency that measures, supports, and transacts in a world of digital things of value.
When Giancarlo preached his ideas in front of the U.S. Congress, it saw the concept of the digital dollar as a potential weapon to be wielded on the new digital front. Yet, it was also perceived as the means to modernize U.S. payment infrastructure to eradicate poverty and improve fiscal performance during the COVID-19 pandemic.
In this multipolar global financial system, the digitization of currency will be perhaps the defining factor in an economy’s success. It’s hardly surprising that the G7 Summit – postponed to later this year – will include discussions on CBDC to delineate the latest development in this field. These discussions will also look towards China’s growing influence on CBDC research, with the Chinese digital yuan -now in trial runs – posing a formidable challenge to the dominance of the U.S. dollar.
The central bank digital currency race could further facilitate mass education on digital currencies and in turn, expedite crypto adoption. Not only could this significantly benefit the crypto space in the long run, as CBDC adoption could lead to improving digital infrastructure that is compatible with different types of cryptocurrencies, but could also lower the barriers to enter the crypto markets.