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Letters "CBDC" surrounded by currency symbols and "CENTRAL BANK DIGITAL CURRENCY"

Market Insider: March 7, 2023

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U.S. Money Reserve

Mar 7, 2023

“Digital currencies” is a broad term used to describe currencies, or currency-like assets, that exist in electronic form. The cryptocurrency Bitcoin is one well-known example of a digital currency. Recently, digital currencies created by central banks have been gaining attention. These assets are known as “central bank digital currencies,” or CBDCs. CBDCs’ growing prominence makes them likely to impact markets soon.

Countries around the world have begun developing digital currencies.

China began rolling out its digital currency, officially known as “the e-CNY,” in 2020. As of April 2022, 260 million people had used the digital currency. Chinese authorities have not ruled out international use of the e-CNY but so far are focusing on domestic use. Bipartisan members of Congress have expressed concerns that the e-CNY could be used to compete against the U.S. dollar as an international currency.

Russia and Iran are reportedly working together to develop another digital currency—one backed by gold. Business Insider reports that the two countries want to establish the “stablecoin,” or digital currency backed by another asset, to circumvent the effects of sanctions.

In late 2022, both the United Kingdom and the European Union expressed interest in establishing their own digital currencies.

Globe surrounded by symbols for currencies and cryptocurrencies

The Federal Reserve has been developing an American digital currency.

On January 20, 2022, the Federal Reserve released a paper on what a digital currency could look like for the United States, but noted that none would be created “without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.” On February 3, 2022, the Federal Reserve Bank of Boston released more in-depth research on developing a central bank digital currency, with technological analysis by researchers at MIT. Again, members of the bank noted that they would move no further without explicit direction from lawmakers.

Then, in March 2022, President Biden signed Executive Order 14067, requiring the government to assess, among other things, the risks and benefits of creating a central bank digital dollar.

In November 2022, Federal Reserve Bank of New York officials launched a digital dollar pilot program. This work was done in conjunction with major financial institutions like Citigroup, HSBC, Mastercard, Wells Fargo, and others. And on March 1, 2023, Nellie Liang, undersecretary for domestic finance at the U.S. Treasury, said that development of a CBDC could come “rapidly.”

Bank symbol and dollar sign surrounded by ones and zeroes

Analysts caution about the risks of digital currencies.

Both the Boston Federal Reserve’s research paper and the original Federal Reserve white paper stated that maintaining consumer privacy could be a challenge after implementing digital currencies. Dr. Eswar Prasad, an economist at Cornell University, says that another risk of digital assets is that a governmental body could limit transactions for products deemed “problematic.”

Megan Greene, global chief economist at risk and financial advisory firm the Kroll Institute, told The Wall Street Journal that implementing a large-scale program like a central bank digital currency could inadvertently cause stability issues, saying, “I think it is inevitable there will be unintended consequences as a result of CBDCs.”

A rollout of central bank digital currencies may shake up markets in the near future as countries around the world continue to roll theirs out.

Read U.S. Money Reserve’s “Market Insider” each week for more economic insights. Nothing herein should be considered as portfolio or retirement advice as U.S. Money Reserve (“USMR”) cannot and does not offer financial advice. Clients should consult a financial advisor for specific advice. This commentary is provided by USMR for informational purposes only and is provided on an “as is” basis without any warranty of any kind, whether express or implied. Your use of the information provided in this commentary is entirely at your own risk. In no event will USMR be held liable for any indirect, special, incidental, or consequential damages arising out of the use of information contained in this commentary.

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