The digital currency issued by the United States Central Bank, CBDC, is designed to replicate the physical U.S. dollar, overseen by the Federal Reserve. Distinguishing itself from cryptocurrencies, it will be fully supported by the Federal Reserve and acknowledged as a legitimate legal tender. That endeavor aims to introduce an additional form of central bank-endorsed currency alongside traditional physical cash and digital bank balances.
While the U.S. still needs to set the wheels in motion for CBDCs, there is a growing need to understand its nature, benefits, the possible ways it could backfire and its current progress.
The U.S. CBDC
The concept of money has had a long road; it evolved from seashells to the gold standard and flat currency, now the primary medium of exchange globally. The release of CBDCs, together with traditional currencies, holds the potential to make cross-border transactions and the international monetary system better.
The White House dropped the curtains on its framework for regulating digital assets, including talk about a digital dollar in 2022. The Federal Reserve highlighted the importance of safety, accessibility, privacy, intermediation, transferability and robust identity verification procedures for a CBDC. Still, it cautioned against inherent red flags, including theft and fraud.
That means taking up a shield for people’s right to privacy, making it easy to handle using digital wallets, making it widely accessible and stopping illegal activity. With CBDCs, the Fed hopes to improve financial options for individuals, businesses and families.
A digital currency must pass a strict assessment, connect smoothly with current systems, emphasize privacy, gain stakeholder nods of approval and show the advantages far outweigh the drawbacks. All of that has to happen before a digital currency could hit the shelves in the U.S.
Digital Dollar Is Less Likely to Happen in the U.S.
President Joe Biden’s orders aside, an Atlantic Council board member, Lisa Pollina, talked about the difficulties in putting the president’s order into practice in an interview with Tearsheet.com. Think-tank The Atlantic Council likened U.S. cryptocurrency interests to China’s dominance. Legal problems and the power of global currencies contribute to hesitancy. To top it off, issues like data privacy and cyber threats call for solutions.
Pollina even lays out the advantages of a digital dollar, such as unbanked access, fraud resistance and quicker payments. There are many ongoing privacy and security risks, cyber threats and surveillance. The U.S. dollar may have to get up from its seat as the world’s reserve currency as CBDCs step in. A challenge comes from China’s digital yuan, which aims to promote its worldwide influence and get around international payment systems.
According to a Bank of America (NYSE:BAC) analysis, a digital dollar isn’t coming for a while, even if CBDCs are possible in the future. Here’s a fun thing to know: 98% of the world’s GDP and 67% of nations are dipping their toes in CBDCs, with 33% already reaching an advanced stage. The Federal Reserve is on the fence about it and only undertakes trial programs with loose commitments, waiting for some backing.
The authors believed CBDCs could improve financial inclusion. They also ring alarms for potential risks like competition with bank deposits and losing monetary control. They are on the edge of their seats for central banks and governments, driving CBDC innovation with the private sector lending a hand. The Swiss National Bank announced a wholesale CBDC pilot with the SIX Digital Exchange and six commercial banks.
Pros and Cons of U.S. Digital Dollar
Digital currency is in the limelight, especially CBDCs, because of a significant trend — cashless transactions and cryptocurrency usage. Financial authorities finally had a fire lit under them and thoroughly assessed the pros and cons of CBDCs.
The pros
Digital currencies have no doubt changed the way people transact. Faster, immediate transfers, international trade boost, what more could there be? Well, here’s some more advantages:
- Unlike traditional banks, digital currencies frequently offer transactions without fees. It gives users complete ownership and a towering advantage over older systems.
- All digital currencies are transparent, especially those using blockchain technology. Easy transaction tracking is nowhere to be seen with the opaque operations of traditional banking.
- Since there is no chance of personal data exposure as with online transactions, digital currencies have the utmost security.
- Digital currencies fill out the potholes in traditional banking and democratize access to financial services. It’s for anyone with an internet connection.
- Digital currencies like Bitcoin (BTC-USD) have a fixed supply, which promises value appreciation over time, unlike traditional currencies, which are at risk of inflation.
The cons
Now, here’s the other side of the coin — the downsides of digital currencies:
- Because digital currency is decentralized and lacks official support, volatility concerns thrive. It can be profitable, but investors, please beware of quick changes in value.
- Despite digital currencies being anonymous, security concerns still exist because there have been plenty of hacks affecting holdings. Traditional banks give better security measures and recovery options for stolen money.
- While users benefit from independence, using digital currencies exposes them to unregulated illegal activity because they exist outside established financial rules.
- Law enforcement is increasingly concerned about people getting more access to digital currencies. Criminal groups could take advantage of its weaknesses for illegal activities like money laundering.
- We already know traditional payment works. Digital currency? Not really. Its originality and dynamic character raise questions about its stability and long-term survival.
Bottom Line
CBDCs are digital representations of national currency accessible to all, including the unbanked. With 100+ countries exploring CBDC integration, the U.S. government’s recent initiative marks a notable advancement in financial technology.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.
