- Central Bank Digital Currencies (CBDCs) are digital versions of fiat currencies held by central banks and offer faster, cheaper, and more secure transactions.
- At least 114 central banks, representing 58% of all countries and generating 95% of global GDP, are exploring CBDCs, with over 10 countries having launched a CBDC, while the US is falling behind.
- There are concerns about the long-term sustainability of the US dollar’s role in the global financial system, but significant barriers to entry for any currency seeking to challenge the dollar’s dominance
Over the last few years, there has been a growing interest in the concept of central bank digital currencies (CBDCs), with many countries looking into creating their own digital currencies held by central banks. While some countries have already launched their own CBDCs or are in the process of testing and piloting them, others like the United States are falling behind on this trend.
CBDCs are digital versions of fiat currencies, backed and maintained by their respective governments. They are designed to function like traditional currencies, but with the added benefits of digital technology. CBDCs offer faster, cheaper, and more secure transactions, with the potential to revolutionize the global financial system.
According to the American think tank Atlantic Council, at least 114 central banks representing 58% of all countries and generating 95% of global GDP are now exploring CBDCs, up from 35 in May 2020. Over 10 countries have launched a CBDC so far, and 89 countries are either piloting, developing, or researching a CBDC.
Australia develops plans
Australia is one such country that has announced plans for a CBDC pilot and study for the eAUD. The Reserve Bank of Australia (RBA) recently invited a small number of companies to explore 14 use cases for the eAUD, including facilitating offline payments, tokenized invoices for businesses, and even livestock auctions. The RBA is partnering with the private sector to conduct the pilot and broader research study, contributing to hands-on learning by industry and adding to policymakers’ understanding of how a CBDC could potentially benefit the Australian financial system and economy.
Companies like ANZ, Mastercard, and Canvas Digital, a layer-2 network built on top of Ethereum that uses zero-knowledge rollups to facilitate transactions, are participating in the program. Canvas Digital has been invited to pilot the settlement of foreign exchange transactions using Circle’s USDC stablecoin and the eAUD.
Zero-knowledge rollups or zk-rollups are a method for increasing the efficiency of an underlying network, in this case Ethereum, reducing settlement times and transaction costs by processing transactions on a separate blockchain and then bundling them together before they are sent back to the underlying network. The technology uses zero-knowledge proofs, a concept in cryptography that allows transactions to be verified without disclosing the details associated with them.
The benefits of using CBDCs and digital currencies like USDC in foreign exchange trading and international remittances are enormous, said David Lavecky, CEO of Canvas Digital. He added that they offer all the benefits of a public blockchain and none of the drawbacks around privacy.
StarkWare co-founder and President Eli Ben-Sasson said that piloting the use cases outlined in the RBA’s announcement could “show people new digital currencies aren’t empty hype” and have functions that fit into people’s normal lives. “Just a few years ago, the idea of rollups was highly theoretical; now they’re playing a part in projects like this,” Ben-Sasson said. “These are exciting times.”
The United States is lagging behind
While many countries are embracing the potential of CBDCs, the United States has been lagging behind. Although there have been discussions and studies on the topic, the Federal Reserve has not yet committed to a CBDC, while other countries like China, Sweden, and the Bahamas have launched their own digital currencies.
In a speech published on the RBA’s website, the assistant governor Brad Jones commented about the increased pressure countries have faced within the past two years to establish a CBDC, including the United States, as countries like China hone the technology and steadily roll it out. He added that there has been growing support, particularly in Congress, behind the idea that the primacy of the U.S. dollar and its role in the global financial system may not be sustainable in the long run.
Factors and concerns involved
One factor that has contributed to this shift in thinking is the increasing use of alternative currencies and payment systems, such as cryptocurrencies and digital wallets, which offer greater convenience and efficiency than traditional financial institutions.
Another factor is the rise of economic powerhouses like China, which has been aggressively promoting its own currency, the yuan, as an alternative to the dollar. In recent years, China has signed currency swap agreements with a number of countries, allowing them to conduct trade in yuan rather than dollars.
Some experts believe that if China continues to gain economic influence, it could eventually challenge the dominance of the U.S. dollar as the world’s reserve currency. This could have significant implications for the global financial system, as well as for U.S. economic and geopolitical power.
There are also concerns about the long-term sustainability of the U.S. debt, which has grown substantially in recent years. If foreign countries, particularly those holding large amounts of U.S. debt, were to lose confidence in the dollar and begin selling off their holdings, it could lead to a sharp decline in the value of the currency.
Despite these concerns, it is important to note that the U.S. dollar remains the dominant currency in the global financial system, and it is unlikely to be displaced anytime soon. The U.S. has a strong and stable economy, and the dollar is widely accepted and trusted around the world.
Furthermore, there are significant barriers to entry for any currency seeking to challenge the dollar’s dominance. For example, the U.S. dollar is deeply embedded in the global financial system, with many countries holding large reserves of dollars and conducting much of their trade in the currency.
In addition, the U.S. government and its institutions have a vested interest in maintaining the dollar’s position as the world’s reserve currency. This gives them significant leverage in the global financial system and allows the U.S. to exercise considerable economic and geopolitical influence.
Overall, while there are certainly reasons to question the sustainability of the U.S. dollar’s dominance in the global financial system, it is likely to remain the dominant currency for the foreseeable future. That said, as the world becomes increasingly interconnected and new technologies emerge, it is important for policymakers and investors to remain vigilant and adaptable to changing economic realities.