2020 saw a significant crypto revolution across the world. Bitcoin broke an all-time high, and several other cryptocurrencies followed suit. There was also a surge in institutional crypto investment, with public companies and high-net-worth individuals pledging billions into cryptocurrencies to protect themselves from the coronavirus-fueled economic crisis.
However, another significant form of progress has come in countries looking into Central Bank Digital Currencies (CBDCs). Several top economies have committed to digitizing their currencies, with places like China and Japan already issuing tests on possible iterations of their CBDCs.
The CBDC craze has undoubtedly washed through countries and continents the world over. Everyone is looking to see who gets the first crack at a national cryptocurrency and whether the asset will be able to deliver its billing.
However, while many countries have declared their intent to launch CBDCs, the United States has been noticeably mum on the subject. Uncle Sam doesn’t appear to be much of a crypto fan, with the government making little to no moves in that line.
Some have suggested that the United States should move in line with other countries and develop a CBDC. However, what are the possible reasons why the government should toe the same line? Apparently, they are quite extensive.
A Growth in Digital Payments
One of the primary reasons why countries launch CBDCs in the first place is to provide adequate help for their digital payment systems. The world saw a significant surge in digital commerce in 2020 due to coronavirus. Most countries believe that this will continue, and they hope to use CBDCs as substitutes for cash that will help anyone looking to make digital payments effectively.
According to data from AksjeBloggen, the global digital payments market should grow to a staggering $6.7 trillion by 2023. According to data from Statista, the industry was valued at $3.1 trillion in 2017.
The Statists data shows that the digital payments industry has continued to grow significantly in the last three years. Going forward, the industry should see a cumulative average growth rate (CAGR) of 12 percent.
AksjeBloggen pointed out that China is leading the world in digital payments, with $1.9 trillion in transactions as of 2020. The United States ranks second with $1 trillion in digital payments. China already made significant progress with its CBDC, launching trials across the country last year. It seems only fair that the United States takes similar steps to ensure that it can keep up.
Protecting the Dollar
Beyond the technical benefit, the United States also has a lot at stake economically if it doesn’t get on the CBDC bandwagon soon. It is common knowledge that the country is amid a significant economic tussle with China. With the latter already making waves with its CBDC, many believed it could usurp the dollar as the global reserve currency.
In November, the Washington Examiner confirmed that National Intelligence Director John Ratcliffe had written to Jay Clayton, the Securities and Exchange Commission (SEC) Chairman. In the letter, Ratcliffe explained that the intelligence community views the Chinese digital yuan as a threat to the dollar and its dominance in the global trade space.
Since the Bretton Woods monetary management system was implemented in 1944, the United States has enjoyed being the issuer of the global reserve currency. Up till now, almost every international trade is being settled in the dollar. This position has allowed the Federal Reserve to enjoy more freedom in money printing. Since there will be demand for the greenback outside the United States, the risk of hyperinflation is much smaller.
Along with the flexibility, the United States’ position also means that its sanctions will be more effective against countries that it believes are threats.
With a thriving digital yuan, China could essentially challenge the dollar’s status in international trade. Many have touted the digital yuan’s efficiency in facilitating trade and completing transactions. If it proves to be more effective than the dollar, then the digital yuan could essentially become the global reserve currency.
Since the digital yuan will be tied to China’s traditional yuan, the United States suddenly has a lot to lose to its bitter economic rival.
Time for Action
Many have asked the U.S. government to begin moves towards a CBDC. Last February, Bloomberg reported that Norihiro Nakayama, the Japanese Vice-Minister for Foreign Affairs, had asked the U.S government to join a coalition of countries studying CBDCs.
At the time, the coalition included central banks from Sweden, Canada, Japan, the United Kingdom, Switzerland, and the European Union. They had been working with the Bank of International Settlements (BIS), sharing critical information and experience to study the potential effects of CBDCs on their economies.
Nakayama had appealed to the U.S. government to step in to keep the dollar’s dominance. In part, he definitely had a point.
Nakayama explained that due to China’s considerably larger population, the digital yuan could see incredible adoption when it launches. Eventually, the asset – if successful – would become the standard for currencies in the global digital framework. Considering that the United States has a lot to lose, it would be prudent to stay on top of this matter.
Ripple Labs, a top blockchain company, also recently posted a job listing for a Senior Director of Central Bank Engagements. The company had been looking for an expert to liaise with the government on a potential CBDC and the asset’s possible benefits.
For now, there is no progress from the U.S. government on the CBDC front. However, there is hope that the next few months will bring some considerable improvement on the matter.