The United States is following China in the digital currency race. here’s why
More than 100 countries are currently exploring central bank digital currencies (CBDCs), which account for at least 95% of the global economy.
CBDCs are the digital version of an official currency. A CBDC may or may not be backed by blockchain technology, but it offers a “sovereign guarantee” that the crypto will not. However, like cryptos, a CBDC should facilitate trust, security, and liquidity.
According to a recent Deloitte report, the Asia-Pacific region has been the “leader” in CBDC projects. “Seven of the top 10 CBDC projects are in the APAC region alone,” he noted.
China became the first major economy to launch a digital currency in 2021, while several developing countries are in various stages of experimentation.
As much as the adoption of CBDCs is the story of developing countries gaining first-mover advantage, it is the story of at least one economic powerhouse that is missing – the United States.
The United States released its first comprehensive Digital Assets Framework (read CBDC) in September 2022.
While analyzing the pros and cons of a US CBDC, the reports urged the Federal Reserve “to continue its ongoing research, experimentation, and evaluation of CBDCs.”
On November 15, the New York Fed announced the launch of a proof-of-concept pilot project to see the feasibility of a CBDC, just days after the release of the results of its bulk research on CBDCs entitled “Project Cedar”.
The US date with the CBDCs came a fortnight after India’s central bank launched its pilot in the government securities market.
India is expected to launch a retail pilot version of the CBDC in December, while the United States is still in the research phase and, according to the US Treasury Department, “could take years to develop” their CBDC.
The U.S.’s lag in developing CBDCs is surprising, given its pre-eminence as a technological innovator. Interestingly, two American researchers established the theoretical framework of blockchain technology – Scott Stornetta and Stuart Haber. Satoshi Nakamoto, the alleged inventor of blockchain, referenced it in the first white paper.
Among the many factors holding the United States back in the race for CBDCs could be the “innovator’s dilemma,” which refers to the fact that a dominant incumbent (the United States in this case) is left behind due to a lack of investment in disruptive technologies.
“The dominant incumbent now faces a stark choice: adopt or fight against these disruptive technologies and, if adopted, how to do so effectively,” notes a 2021 Brookings article.
The cautious approach of the United States towards CBDCs is disconcerting if one of the factors is the imminent threat of China dominating the financial system.
As a report in TIME noted the magazine, developments in the digital currency space will not only impact the financial world, but will also boost the geopolitical ambitions of countries.
As China and the United States vie for superpower position, digital currencies are set to play a major role in defining 21st century commerce and finance.
According to reports, China harbors ambitions to use its CBDC – the digital yuan – for global trade payments. China’s move therefore has the potential to undermine the international dominance of the US dollar.
Nevertheless, each time the United States launches its own CBDC, it should revamp the global economic system. Anmol Chawla, the co-founder of Taxcryp, said the CBDC would help the United States maintain its economic dominance.
“The United States wants continued dominance of the dollar to protect its status as the world’s reserve currency and ward off threats from countries like China,” he said.
Some experts further support the US’s cautious approach to CBDCs, saying that threats of volatility and piracy should be considered before a CBDC is launched.
“The focus should be on the right solution for the market, not the first solution on the market,” said Yoda Regev, CEO of Qonetum Finance.
Featured Video of the Day
India cannot be developed until it is corruption-free: Union Bank