These digital currencies are the alternative that central banks are looking to develop in order not to be out of the game.
The financial Company JP Morgan recently commented that Central Bank Digital Currencies (CBDC) could be a threat to the global hegemony of the US dollar.
The US financial advisory company Bloomberg published a report in which the bank’s US chief economist stated that: “There is no country with more to lose from the disruptive potential of digital currency than the United States”.
“This revolves primarily around U.S. dollar hegemony. Issuing the global reserve currency and the medium of exchange for international trade in commodities, goods, and services convey immense advantages”, Josh Younger, Head of U.S. Interest-Rate Derivatives Strategy, and Michael Feroli, Chief U.S. economist, wrote in the report.
According to Bloomberg, central banks could introduce digital currencies, but they’re unlikely to have the transformative impact some have hoped. Thus, JP Morgan doubts that CBDCs will soon replace the dollar as the global reserve currency. However, the report warns that the “fragile” peripheral aspects of the dominance of the US dollar can erode, including trade finance, and the SWIFT message system.
Digitizing the Hegemony of the US Dollar
The analysts added that even an “aligned power” like the European Union (EU) might want to reduce U.S. sway over global payment systems. JP Morgan also commented that other countries could use digital currencies to circumvent the SWIFT system and economic sanctions. This action would undermine the power of the United States of America on a global stage with the global reserve currency.
“Offering a cross-border payment solution built on top of a digital dollar would, particularly if designed to be minimally disruptive to the structure of the domestic financial system, be a very modest investment to protect a key means to project power in the global economy”, the inform explains.
This inform concludes saying that “for high-income countries, and the U.S. in particular, digital currency is an exercise in geopolitical risk management”. Besides, Chairman Jerome Powell said, last February, that the Federal Reserve was undertaking broad work looking at the issues concerning a digital currency whilst making no commitments.
CBDCs Seek to Be an Alternative to Cryptocurrencies
Some users and even economists believe that Central Bank Digital Currencies (CBDCs) are “a kind of rearguard action that central banks struggle with because they don’t like cryptocurrencies”.
China, through the People’s Bank of China, wants to launch its Central Bank Digital Currency (CBDC). Similarly, Cambodia, Thailand, Bahrain, and Uruguay are working on developing their fiat currencies as digital currencies.
The World Economic Forum (WEF) is also working on this issue. Last January, the WEF presented its annual event on the debate and resolution of global challenges. One of the topics for discussion was helping central banks understand CBDCs, as well as helping them launch their CBDCs, if necessary.
The WEF also launched a framework called the CBDC Policy-Maker Tool Kit to help central banks wishing to create their CBDC. The WEF created this framework in conjunction with more than 40 central banks and international organizations.
“This document serves as a possible framework to ensure that any CBDC implementation fully considers the potential costs and benefits, evaluating a multitude of risks and evaluating implementation and governance strategies, alternative solutions, and other important factors”, the WEF explained.
CBDCs represent a growing trend in technology adoption. They promise faster cross-border transactions, reduced transaction costs, and financial inclusion for settlements worldwide.
By María Rodríguez
