U.S. Congressman Stephen Lynch (D-MA) recently voiced his concerns regarding the potential impact of a U.S. central bank digital currency (CBDC) on other cryptocurrencies. Lynch’s concerns are not unfounded, as a retail CBDC could compete with existing cryptocurrencies by offering greater efficiency and stability.
The US is Late to the Party
As the Congressman’s comments suggest, the US has been lagging behind other countries in the race to launch a CBDC. Currently, 11 countries have already launched, and nearly 90 countries are either piloting, developing, or researching a CBDC.
This delay could have significant ramifications for the US’s economic competitiveness in the future.
Is a CBDC Even Necessary?
Fed Chair Jay Powell has stated that the Fed has not yet determined whether the US requires a CBDC. This begs the question of why so many other countries have embraced digital currencies already.
Nonetheless, given the potential benefits, it’s difficult to see why the United States wouldn’t want to create one. A CBDC could improve financial inclusion and efficiency and speed up cross-border transactions.
Wholesale CBDC Already in Development
While a retail CBDC does not appear to be a priority for the Fed at present, the central bank is already developing a wholesale version (wCBDC). A wCBDC would be restricted to bank-to-bank transactions rather than being available to the general public. The announcement of this development has led to speculation about the potential impact on cryptocurrencies, particularly Bitcoin.
Federal Reserve’s White Paper on Wholesale CBDC
The Fed’s white paper on Project Cedar outlines the objectives of its wCBDC initiative. The project aims to improve the efficiency of wholesale payment systems by reducing settlement times and minimizing counterparty risks. While the wCBDC would not be available to retail customers, it could still significantly impact the wider cryptocurrency market.
Implications for Cryptocurrencies
“You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies if you had a digital U.S. currency,” said Fed Chair Powell. “I think that’s one of the stronger arguments in its favor.”
A CBDC would offer a number of advantages over existing cryptocurrencies, including greater stability and lower volatility. As such, it could lead to a decline in demand for other cryptocurrencies, which could, in turn, result in a decline in their value.
The government backs a CBDC with full faith and credit, making cryptocurrencies incomparable directly.
Competition or Cooperation?
One possibility is that a CBDC and other cryptocurrencies could coexist, each serving different needs. Investors could use cryptocurrencies for speculative investments, while a CBDC could serve as a means of everyday transactions. It is also possible that CBDCs and cryptocurrencies could compete directly, with the former gradually replacing the latter.
The outcome of this competition will depend on a range of factors, including the perceived benefits of each technology and the regulatory environment in which they operate.
The development of a CBDC raises a number of regulatory concerns. For example, regulators will need to safeguard the privacy and security of transactions. Additionally, the development of a CBDC could disrupt existing payment systems and business models. Regulators will need to walk a fine line between innovation and stability, ensuring that the benefits are realized without causing undue harm to existing businesses and consumers.
The development of a wholesale CBDC by the Fed could be seen as a sign that the US is starting to take the technology seriously, as Congressman Lynch’s concerns about the impact on other cryptocurrencies are well-founded.
Yet, there are still a number of unanswered questions about the need for a CBDC in the US and the potential impact it could have on the wider cryptocurrency market.
Develop or Not?
Ultimately, the US will have to decide whether it wants to develop a retail CBDC. Or risk falling behind in the dynamic digital currency landscape.
As the Congressman rightly pointed out, a US digital currency could significantly impact the value and viability of other cryptocurrencies. The US government has not yet shown whether it will take action. Or they may continue to prioritize other financial initiatives.
The conversation will continue as more countries explore this technology and as the global financial system evolves.
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