The underlying tech of a central bank digital currency wasn’t enough to convince some panelists at a Fed conference that it could change the international currency system.
A note published by the United States Federal Reserve at a recently held conference found a majority of exports believe a U.S. dollar central bank digital currency (CBDC) would not drastically change the global currency ecosystem.
Panelists at the conference also agreed that CBDC development outside of the U.S. doesn’t threaten the status of the dollar, but the development of cryptocurrencies could alter the role of the dollar globally, with some saying stablecoins could even boost the U.S. dollar’s role as the global dominant reserve currency.
The assessments came from expert panelists at a June 16 and 17 conference hosted by the Federal Reserve on the “International Roles of the U.S. dollar” collated into a note and published by The Fed on July 5. The conference was used to gain insight from policymakers, researchers, and market experts to understand “potential factors that may alter the dominance of the U.S. dollar in the future” including new technologies and payment systems.
A discussion on a panel addressing digital assets and if CBDCs would provide advantages for the dollar had panelists agree that the underpinning technology alone wouldn’t “lead to drastic changes in the global currency ecosystem”.
Speakers on the panel included the digital currency initiative director at MIT, Neha Narula, head of research at the Bank of International Settlements, Hyun Song Shin, chief investment strategist at asset management firm Bridgewater, Rebecca Patterson, and HSBC bank’s head of FX research Paul Mackel.
The panelists agreed that factors such as market and political stability, along with market depth, are more crucial for dominant reserve currencies like the U.S. dollar than the development of a Fed issued digital dollar.
The development of CBDCs by other countries was also generally agreed by the panel to have a tendency to focus more heavily on that country’s own domestic retail market, and therefore was considered “not a threat to the U.S. dollar’s international status”.
The Federal Reserve noted the amount and scope of CBDC’s for making cross-border payments is “still quite limited”, suggesting that these systems don’t yet pose a threat to the dollar, which accounts for a majority of international financial transactions according to an October 2021 note.
Focusing on cryptocurrencies, panelists said further development of digital assets could change the international role of the dollar, but adoption by institutional investors was throttled by a lacking regulatory framework, leaving the current crypto market to be dominated by speculative retail investors.
Another panel including Fed financial research advisor Asani Sarkar and finance professor Jiakai Chen concluded that part of the demand for crypto, especially Bitcoin (BTC), was driven by a desire to evade domestic capital controls, citing BTC prices in China trading at a premium in comparison to other countries.
Despite this, the Fed says panelists didn’t see crypto as a threat to the global role of the dollar in the short term. Some even suggested in the “medium run” that crypto could reinforce the dollars’ role if “new sets of services structured around these assets are linked to the dollar”, a likely reference to stablecoins, cryptocurrencies pegged to the value of a fiat currency (usually USD.)
The advice by panelists may help put a new spin on things for members of the Federal Reserve.
Previously, the Federal Reserve Board of governors said in June that stablecoins not sufficiently backed by liquid assets and proper regulatory standards “create risks to investors and potentially to the financial system” likely referencing the collapse of TerraUSD Classic (USTC).
The comment by the Board came before Federal Reserve chair Jerome Powell stated a CBDC could “potentially help maintain the dollar’s international standing”.