A note published by the US Federal Reserve on a recent conference revealed that most participants believe that a US central bank digital currency (CBDC) would not drastically change the global monetary ecosystem.
Conference panelists also agreed that the development of CBDCs outside the United States does not threaten the status of the dollar, but that the development of cryptocurrencies could alter the role of the dollar globally. Some said stablecoins could even boost the dollar’s role as the world’s dominant reserve currency.
The valuations come from experts who participated in a conference organized by the Federal Reserve on June 16 and 17 on the “International Role of the US Dollar”, compiled in a note and published by the Fed on July 5. The conference provided policy makers, researchers and market experts with an insight into “potential factors that may alter the dominance of the US dollar in the future”, including new technologies and payment systems.
In a debate about digital assets and whether CBDCs would be an advantage for the dollar, panelists agreed that core technology alone would not “bring about dramatic changes in the global monetary ecosystem”.
Panel speakers included MIT Digital Currency Initiative Director Neha Narula; the head of research at the Bank for International Settlements, Hyun Song Shin; Bridgewater asset management firm Chief Investment Strategist Rebecca Patterson; and the head of foreign exchange research at HSBC bank, Paul Mackel.
Panelists agreed that factors such as market and political stability, along with market depth, are more crucial for dominant reserve currencies like the US dollar than the development of a Fed-issued digital dollar..
The panel also agreed that the development of CBDCs by other countries tends to be more focused on the country’s own retail market and was therefore considered to be “not a threat to the international status of the US dollar”.
The Federal Reserve noted that the number and scope of CBDCs for cross-border payments “still quite limited,” suggesting these systems are not yet a threat to the dollarwhich accounts for the bulk of international financial transactions, according to an October 2021 note.
Focusing on cryptocurrencies, panelists stated that further development of digital assets could change the international role of the dollar, but that adoption by institutional investors has been held back by the lack of a regulatory framework, which has made the current asset market cryptocurrencies is dominated by speculative retail investors.
Another panel, including Fed financial research adviser Asani Sarkar and finance professor Jiakai Chen, concluded that part of the demand for cryptocurrencies, especially bitcoin (BTC), was driven by the desire to evade national capital controlsciting that BTC prices in China are trading at a premium compared to other countries.
Despite this, The Fed says the panelists did not see cryptocurrencies as a threat to the dollar’s global role any time soon. Some even suggested that in the “medium term” cryptocurrencies could reinforce the role of the dollar if “new sets of services structured around these assets are pegged to the dollar.”a likely reference to stablecoins, cryptocurrencies pegged to the value of a fiat currency (usually the dollar).
Panelists’ advice may help put a new spin on things for Fed members.
The Federal Reserve Board of Governors said in June that stablecoins that are insufficiently backed by liquid assets and adequate regulatory standards “create risks for investors and potentially the financial system.”likely referencing the collapse of TerraUSD Classic (USTC).
The Board’s comment came before Federal Reserve Chairman Jerome Powell declared that a CBDC could “potentially help maintain the international standing of the dollar.”.
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