Central bank digital currencies could threaten the dollar, expert says – Markets Insider

• The US Treasury just made its strongest indication that a central bank digital currency is on the table. 
• “[W]e are engaging in the technological development of a CBDC so that we would be able to move forward rapidly if a CBDC were determined to be in the national interest.”
• But an expert says a proliferation of CBDCs could impact the dollar’s role on the world stage. 

Lawmakers are still weighing whether to have a central bank digital currency, but the US Department of the Treasury just made its most significant indication that it’s on track to become a reality. 

On Wednesday, Nellie Liang, under secretary for domestic finance at the Treasury, said the technological development of a CBDC is underway so that, if policymakers give the go-ahead, the project can come to fruition rapidly.

A US digital dollar, Liang said, would be legal tender and users could convert it one-for-one with other forms of central bank assets, like paper money or reserves. Additionally, a CBDC would be able to clear and settle almost instantly, similar to cryptocurrencies and stablecoins. 

Ananya Kumar, associate director for digital currencies at the Atlantic Council, told Insider that common motivations for pursuing a digital dollar including the promotion of a more inclusive financial system, easier access for unbanked populations, as well as lowering transaction costs. Downside risks remain, however.

“The technological evolution across the world, with 114 countries exploring their own CBDCs, sometimes in collaboration with each other, can also create greater fragmentation and could potentially impact the dollar’s role as the world’s reserve currency,” Kumar said. 

In her view, whether a CBDC enters circulation and gains widespread adoption will ultimately come down to the transparency of its development process.

Meanwhile, Ari Redbord, head of legal and government affairs at TRM Labs, pointed out that a CBDC mimics many of the benefits of dollar-backed stablecoins, such as USDC.

Redbord also believes the US must carefully evaluate the space, given that China is embarking on a similar digital currency program that’s aimed at competing with the dollar. 

“On the one hand we want to ensure that the U.S. is a leader in the digital assets space, but on the other hand we want to ensure that a digital dollar is secure, private, and interoperable,” Redbord told Insider. “Usually I would say let’s go, but I think it is really important to study this issue. We should not simply unleash a CBDC in response to China’s digital yuan.”

In her Wednesday speech, Liang differentiated between wholesale and retail digital dollars. Commercial banks could use wholesale CBDCs, for example, for settling interbank transactions, or they could be used for cross-border transactions.

The upside for a retail CBDC, meanwhile, comes from access, rather than technology, but could also destabilize private sector lending during times of duress, she added.

“Unlike central bank reserves, a retail CBDC would complement, not replace, cash as a digital liability of the central bank that is accessible to the general public,” Liang said, adding that it would also contribute to a more competitive payment system and promote financial inclusion.