Fed event: Some panelists unconvinced by a CBDC's basic technology
Some conference panelists at the Fed event are still unconvinced by a CBDC's basic technology.
A Federal Reserve note on a recent conference found that most exporters believe a U.S. dollar central bank digital currency (CBDC) would not have a profound effect on the global currency ecosystem.
At the conference, panelists also agreed that the development of CBDCs outside the U.S. does not threaten dollar's status, but cryptocurrencies could change its role globally, with some saying stablecoins could even boost its role as a global reserve currency.
The assessments were gathered from expert panelists at a June 16 and 17 conference hosted by the Federal Reserve on the "International Roles of the U.S. dollar". The conference was used to gather insight from policymakers, researchers, and market experts about "the future of U.S. dollar dominance" including new technologies and payment systems.
A panel discussion on digital assets and if CBDCs would provide advantages for the dollar had panelists agree that the underlying technology alone wouldn’t “cause drastic changes in the global currency ecosystem.
Speakers on the panel included MIT's digital currency initiative director, Neha Narula, the Bank of International Settlements' head of research, Hyun Song Shin, Bridgewater's chief investment strategist Rebecca Patterson and HSBC bank's head of FX research Paul Mackel.
The panelists agreed that factors such as market and political stability, along with market depth, are more important for dominant reserve currencies like the U.S. dollar than the development of a Fed issued digital dollar.
The development of CBDCs by other countries was considered "not a threat to the U.S. dollar's international status" because it was generally agreed that they tended to focus more heavily on that country's own domestic retail market.
The Federal Reserve pointed out that the use of CBDCs for cross-border payments is still quite small, indicating that these systems don't pose much of a threat to the dollar, which is used in a majority of international financial transactions according to an October 2021 report.
Panelists expressed that the further development of cryptocurrencies could change the international role of the dollar, but they said that institutional investors were not adopting digital assets because there was no regulatory framework in place and that left the market to be dominated by retail investors.
In another panel, which included Federal Reserve financial advisor Asani Sarkar and finance professor Jiakai Chen, it was concluded that a part of the demand for crypto, especially Bitcoin (BTC), was driven by a desire to evade domestic capital controls. This conclusion was based on BTC prices in China trading at a premium when compared to other countries.
The Fed says that panelists didn't see crypto as a threat to the global role of the dollar in the short term. Some even suggested that in the "medium run", if "new sets of services structured around these assets are linked to the dollar", crypto could reinforce its role, a likely reference to stablecoins, cryptocurrencies pegged to fiat currency (usually USD.)
Panelists' advice may give Federal Reserve members a new perspective.
In June, the Federal Reserve Board of governors said that stablecoins not sufficiently backed by liquid assets and following proper regulatory standards "pose risks to investors and could potentially affect the financial system" likely referring to the collapse of TerraUSD Classic (USTC).
Jerome Powell, Federal Reserve chair, said that a CBDC could "potentially help maintain the dollar's international standing" before the Board of Governors commented on it.