Creating a US Central Bank Digital Currency (CBDC) before other major jurisdictions is not essential for the long-term status of the US Dollar. This is the personal opinion of Governor Christopher J. Waller, a member of the Board of Governors of the Federal Reserve System, while speaking at the “Digital Currencies and National Security Tradeoffs” symposium at Cambridge, Massachusetts, on October 14, 2022.
According to the Atlantic Council, 105 countries, representing over 95 percent of global GDP, are exploring a CBDC, ten countries have fully launched a digital currency, 19 of the G20 countries are exploring a CBDC, with 16 already in development or pilot stage, and many countries are exploring alternative international payment systems.
China was the first major economy to pilot the digital Yuan in 2020. The pilot of the digital Yuan has been conducted in many regions within China. Meanwhile, the European Central Bank (ECB) is currently in the investigation phase of the digital euro. If this phase is successful, it aims to deliver a digital euro by the middle of the decade.
Some researchers have argued that introducing a CBDC by a major economy before the launch of a US CBDC could threaten the role of the U.S. dollar as the world’s dominant currency. The Atlantic Council reports that of the G7 economies, the US and UK are the furthest behind on CBDC development.
Governor Wallace says that the proponents for a CBDC tend to promote the potential technological advantages of CBDCs, which include reducing payment frictions through lowering transaction costs, enabling faster settlement speeds, and providing a better user experience but fall short of emphasising the underlying reasons for the dominance of the US dollar.
In addition, Governor Wallace argued that the underlying reasons for the US dollar’s dominance had little to do with technology. According to Governor Wallace, introducing a CBDC would not affect those underlying reasons.
“Though CBDC systems may be able to automate several processes that, in part, address these challenges, they are not unique in doing so. Meaningful efforts are underway at the international level to improve cross-border payments in many ways, with the vast majority of these improvements coming not from CBDCs but improvements to existing payment systems”, Governor Wallace said.
The international role played by the US dollar may be traced to the Bretton Woods agreement of 1944 that aimed to create an international monetary system to replace the previous gold standards and to improve economic cooperation and growth among nations. Following the Bretton Woods agreement, member countries agreed to keep their currencies fixed but adjustable to the US dollar and with the US dollar fixed to an agreed price of gold.
The Bretton Woods system lasted until 1971, when the United States could no longer redeem dollars for gold at the official price. However, the role of the US dollar as a reserve currency and for global trade has continued well after the Bretton Woods agreement.
Governor Wallace said that the US dollar remains by far the dominant currency for international trade and that 60 percent of disclosed official foreign reserves are held primarily on liquid U.S. Treasury securities.
“The factors driving the dollar’s role as a reserve currency are well researched and well demonstrated, including the depth and liquidity of U.S. financial markets, the size and openness of the U.S. economy, and international trust in U.S. institutions and the rule of law. We must keep these factors in mind in any debate regarding the long-term importance of the dollar”, Governor Wallace stated.
Governor Wallace proposes that the debate should focus on exploring salient CBDC-related topics, like its effects on financial stability, payment system improvements, and its impact on financial inclusion.