As we discussed in our last blog post, digital currencies are playing a rapidly expanding role in the global economy. Although the instability of cryptocurrency poses a great risk to investors, the technology behind the coins has proven to be advantageous. The emergence of cryptocurrencies and blockchain technology has inspired central banks around the world to take a new approach to issuing money. Recently, many countries have begun testing Central Bank Digital Currency (CBDC), a form of legal tender that exists digitally, rather than physically. It is the electronic version of the official currency of the region or nation.
While physical legal tender provides stability and regulation, cryptocurrencies bring about efficiency and inclusion through technology. CBDC, which combines the technology of cryptocurrency with the order of legal tender, is slated to provide the benefits of both. Most central banks intend to have CBDC serve as a complement to physical money and other digital payments systems.
Currently, 81 countries including the U.S. are exploring the possibility of CBDC, up from just 35 countries in May of 2020. Together the 81 countries represent over 90% of the world’s GDP, making the shift to digital currency even more impactful to the global economy.
Although the countries are at various points of progress and have differing timelines, the trend towards digital currency is quite apparent.
When speaking on the potential for a digital dollar, Jerome Powell, the Federal Reserve Chairman, emphasized the Fed’s intent to “get it right” and not to “do it fast.” Although the U.S. lags behind China, the E.U., England, and Japan, the Fed’s slow pace appears to be a calculated attempt to perfect the digital dollar. Powell has expressed caution when talking about digital currencies, as he wants to ensure that the benefits outweigh the costs. It has also been emphasized that, under the U.S. implementation, CBDC is not intended to fully replace physical currency, just to complement it.
China has emerged as a front runner in the CBDC space, having run the most successful pilot program of the world’s large economies. Chinese officials have taken a very different approach than their American counterparts, with plans to have a digital currency circulating in Beijing by the 2022 Winter Olympics. Because CBDC is still in its infancy, many central banks are monitoring the success of China’s digital currency as they roll out their own plans.
CBDC is bound to play a growing role in the global economic system. Some people fear that China’s first-mover advantage and the U.S.’s relative underdevelopment may pose a threat to the dollar’s reserve currency status.
Look out for our next blog post to see why we believe these fears could be misleading.
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