Brainard is concerned that Europe and Asia could issue CBDCs that threaten the status of the US dollar as a global reserve currency. Various countries are researching CBDCs, but many of them are still in the development stage, like in the case of China.
The US House Committee on Financial Services recently held a hearing with Lael Brainard, the Vice-Chair of the US Fed. They met with her to analyze the risks and benefits of developing an American central bank digital currency (CBDC).
Brainard stated that it might take five years to implement the necessary security features and design features. For that reason, she considers that a CBDC would allow anticipating the future of the financial system rather than meeting current needs.
Among the risks of CBDCs, Brainard argued that stablecoins would become the dominant form of US digital dollars. In addition, she said that this could lead to the fragmentation of the US digital payment system.
Lael Brainard is also concerned that European and Asian central banks could issue unrivaled digital analogs to cash. That action would threaten the status of the US dollar as a global reserve currency.
The government official highlighted at the hearing that a CBDC project supported by the Fed would still need government approval. Congress and the White House must give the go-ahead to design and implement those digital assets.
Central Banks from Various Countries Are Researching CBDCs
The proliferation of CBDCs worldwide has raised questions about whether the United States has fallen behind. The international financial system has evolved, which might affect the status of the US dollar as a reserve currency.
Various countries are exploring CBDCs, but many are still in the research and development stage. For example, the People’s Bank of China (PBOC) developed and launched the digital yuan (eCNY). That allowed daily payments for about two million yuan (USD 315,761) at the Beijing 2022 Winter Olympics.
The European Central Bank (ECB) is researching CBDCs to develop a prototype in 2023 and introduce a European CBDC in 2025.
The committee also said some leaders of the Group of 20 (G20) have talked to various international organizations. They encouraged the IMF, the World Bank, and the BIS to analyze the role of CBDCs in improving cross-border payments and the global monetary system.
CBDCs Could Contribute to Evading the Sanctions Imposed by the US
The collapse of the algorithmic stablecoin TerraUSD (UST), among other recent events, has caused concerns over the US economy.
The report details that ongoing volatility and the collapse of UST could lead to financial instability within the cryptocurrency ecosystem. For that reason, some digital asset stakeholders have argued that central banks should prioritize the development of CBDC.
However, the committee experts consider that the initial interest in CBDCs in countries like Iran, Russia, and Venezuela may have been US sanctions evasion. The attractiveness of digital assets rapidly grew in Russia after the US and its allies imposed restrictions.
Current crypto assets like Bitcoin provide anonymity and decentralization, in contrast to the global banking sector. For that reason, various companies have refused to share user data despite the requirements of the sanctioning countries.
By Alexander Salazar
