A recent paper from the U.S. Federal Reserve explores the impact of a central bank digital currency (CBDC) on the dollar’s international role. It concludes that a CBDC would have no material impact on dollar dominance but adds a critical caveat “in the absence of large geopolitical changes separate from CBDC issuance.” The potential benefits of introducing a CBDC can be achieved by other payment system improvements that are already in progress.
It reiterates that the dollar’s appeal is based on factors unrelated to technology. These include a stable government, a strong judiciary, legal property protections, a healthy economy, liquid capital markets and the ample availability of Treasuries for investment.
This dominance is born out by published statistics from 20 years to 2019. Outside of the Americas, the only region where the dollar is not dominant for cross border invoicing is Europe. There the euro is used for 66% of transactions. The dollar is used for 74% of Asia-Pacific invoices and 79% in the rest of the world.
CBDC design
The paper explores factors within U.S. control, such as the design of a CBDC and other policy decisions, versus the actions of other jurisdictions.
Most of today’s cross border frictions are less about technology and more about policy decisions. For example, most central banks don’t allow foreign banks access to central bank accounts. Foreign banks have to hold dollar Nostro accounts with other banks to make dollar payments. If they don’t, they need to send payments via correspondent banks. That adds friction and cost. Anti money laundering (AML) protocols often require manual interventions that also add cost and slow down payments.
Better interoperability between payment systems could improve the dollar’s position as a medium of exchange and ultimately a store of value. However, it’s possible to achieve those benefits with or without a CBDC.
Foreign activities beyond U.S. control
Areas where the United States has less control include foreign stablecoins. These could be denominated in dollars or other currencies. If there’s sufficient demand for stablecoins launched before a CBDC, it could impede the adoption of a CBDC. If a stablecoin not denominated in dollars gets serious traction, that could also impact dollar demand. While others have stated that stablecoins enhance the dollar’s role because dollar stablecoins are currently dominant, the Fed refrained from making such a statement.
Regarding the introduction of foreign CBDCs, the paper is somewhat dismissive. “If one or more large countries were to introduce an internationally accessible CBDC that were appealing across several dimensions—such as cost, speed, and user experience—then the appeal of these currencies might gain on the margin,” the authors wrote. It reiterated the core appeal of the dollar is based on the fundamentals that make the currency attractive. So, other jurisdictions would have to replicate those factors to be competitive rather than simply introducing a CBDC.
As we’ve previously reported, getting Congress to approve the launch of a retail CBDC might be challenging. Republicans are vehemently opposed, primarily on the grounds of privacy and self-directed control.
During previous debates, a handful of Democrats have also expressed CBDC misgivings based on the uncertain impacts on banks, specifically bank lending. In the meantime, Republicans have moved to introduce numerous pieces of anti-CBDC legislation at the state and federal levels. A few of those dissenting Democrats might have backed those laws but refrained from doing so because their wording was perceived as supporting cryptocurrencies and stablecoins.
