Even though the Federal Reserve is likely still a few years away from establishing its own, Wall Street is warming up to the possibility that central bank digital currencies are the next major disruptive force on the horizon. Digital money is gaining traction as the future of an increasingly cashless world, with countries as big as China and as small as the Bahamas leading the way. In some ways, a digital dollar would be similar to cryptocurrencies like bitcoin or Ethereum, but in other ways, it would be distinct. The central bank digital currency will behave more like dollars and have universal acceptance rather than being a tradable commodity with wildly fluctuating values and limited use. It will also be fully governed and centralised. A big organisation like the Fed would have to answer a slew of questions before getting involved. However, there is increasing global momentum.
In a client paper, Morgan Stanley's chief economist, Chetan Ahya, said that a big move to implement central bank digital currencies (CBDCs) could potentially disrupt the financial system. “Efforts to adopt CBDCs are gaining traction, with as many as 86 percent of the world's central banks looking into the possibility.” According to a 2020 survey conducted by the Bank for International Settlements, nearly every central bank in the world has worked on digital currencies in some capacity. Just 14% have initiated on a pilot programme or are in progress, despite the fact that 60% are working on “proof of concept” research.
Concerns in many fields
Along with the excitement about a potential new future for the financial sector, has come a concern about how to execute it properly. On the other hand, proponents of central bank digital currencies point to a number of benefits. Giving unbanked citizens access to the financial system is the most important of these factors. There's also the matter of speed. If money could be deposited directly into digital wallets, transfers, such as those made by governments to citizens during the Covid-19 crisis, would be quicker and simpler. In recent remarks at a joint meeting with the World Bank, Kristalina Georgieva, managing director of the International Monetary Fund, said that “new forms of digital money could offer a parallel boost to the critical lifelines that remittances provide to the poor and developing economies.” “Those most at risk of being left behind by the pandemic will be poor citizens sending small value remittances.”
Some financial institutions, both conventional and fintech, could lose deposits as a result of people putting their money into central bank accounts, which would be a potential loser from digital currencies. Concerns about privacy and incorporation have also been raised.
2.0 version of digital money
Wall Street is growing in anticipation of what the future holds as the Fed and other central banks work through those technical issues. Citigroup said in a study that "the race to Digital Money 2.0 is on." “It's been described as a new Space Race or a Cold War of Digital Currencies by others. It doesn't have to be a zero-sum game, in our opinion, because there's plenty of space for the overall differential to grow. However, there has been some semblance of a race, with China appearing to be in the lead. Some worry that China's advantage, gained with the introduction of a digital yuan last year, would erode the dollar's position as the world's reserve currency. Though China has stated that this is not its goal, a Bank of America report claims that issuing digital dollars would enable the US currency to “remain highly competitive... relative to other currencies.”
Bank of America economist Anna Zhou wrote, “CBDCs provide the advantages of improved monetary transactions without the negative side effects of crypto currencies.” Following the Bahamas' lead with the Sand Dollar, a number of other countries have begun work on projects. The Federal Reserve is currently collaborating with the Massachusetts Institute of Technology on a project to assess the feasibility of a digital currency, but there is no fixed timeline for when or whether the US central bank will take action. In a recent interview with CBS's "60 Minutes," Fed Chairman Jerome Powell said, "There are many subtle and difficult policy choices and design choices that you have to make." “All of the work is being done by us,” he said. “We haven't decided because, once again, the question is whether it will help the people we represent. And we must adequately respond to that question.”
Greg Baer, CEO of the Bank Policy Institute, an industry advocacy organisation, warned of a possible "diminishment" of the conventional banking system in a working paper on the topic. “The effect on economic growth could be significant,” he said, unless the central bank either took over lending or became a daily source of funding for banks. Baer wrote, “The path forward is currently unclear, and design decisions could result in very different outcomes.” He emphasised the Fed's prudence, contrasting it with the European Central Bank's "more precipitous" intervention.
'Cash is becoming extinct'
The European Central Bank (ECB) is going forward with its “britcoin” project, despite the fact that it has stated that it will only serve as a conduit for banks. “This ‘britcoin' will be linked to the value of the pound, removing the possibility of profiting from owning it as an asset. According to Jeremy Thomson-Cook, chief economist at international business payments specialist Equals Money, "there may be an economic effect in the form of increased investment in the UK tech sector and lower transaction costs for international businesses." “I believe this validates the assumption that cash is on its way out and that, with the exception of incidentals or speculative spending, the entire payments environment will be completely online within the next decade,” said Thomson-Cook. Despite the almost insurmountable challenge of moving to digital currencies backed by central banks, US authorities seem to be taking their time.
Powell has also stated that the Fed would not operate without explicit legislative authorization and that various issues must be addressed. Although central banks' CBDC initiatives aren't meant to disrupt the banking system, Morgan Stanley's Ahya believes they will. “The greater the acceptance of digital currencies, the more opportunities for innovation and the greater the risk of financial system disruption.”