China is already far along in developing a digital currency

China is among the furthest along in piloting a digital currency, giving the world’s second-largest economy the opportunity to be the leader and standard-setter for this critical digital infrastructure.

Yaya Fanusie, adjunct senior fellow at the Center for a New American Security, noted that China plays an influential role at the Bank for International Settlements, which is set to lead deliberations over central bank digital currency standards. Those standards could end up benefitting China’s goals and interests instead of the US’s. “The United States will need to increase its CBDC expertise and assert greater influence in the BIS and other international forums that guide CBDC development,” Fanusie testified.

It’s the Federal Reserve or Facebook

If central banks don’t upgrade their payment systems, multinational companies like Facebook (whose initial digital coin effort was greeted by governments with a barrage of concerns) and Amazon could pull ahead and disintermediate the government authorities.

“In a scenario where one or two Big Tech firms succeeded in dominating the entire US payments system, policymakers would face a regulatory nightmare in seeking to preserve consumer privacy and equitable treatment of small businesses,” Dartmouth’s Levin wrote.

A digital currency would support the dollar’s role globally

The US dollar is the main currency for international transactions, giving the American government outsize influence in global affairs through the use of sanctions. If central bank digital currencies prove to be more efficient than the existing, dollar-heavy correspondent banking system, that could gradually undermine the dollar’s role in international payments, noted Julia Friedlander, senior fellow and deputy director at the Atlantic Council’s GeoEconomics Center. “The use of CBDCs as a payments technology could begin to cause cracks in the dollar’s ubiquity in international transactions,” Friedlander testified.

Central bank digital currencies still have risks

Despite the advantages, a central bank digital currency also has some serious risks for the economy and the financial system. If regular people can create accounts directly with the central bank, that could undermine the existing commercial banking system. Depending on how the electronic money is designed, it could be exploited by money launderers and hackers. If the government fails to protect the system from outages and cyber attacks, people could lose confidence in the lender of last resort.

Even so, a number of experts think central bank digital money has promise, and is likely inevitable. “The US strength in the international payments and financial services space is an American treasure that has tremendously benefited the country,” wrote Robert Baldwin, head of policy at the Association for Digital Asset Markets, in his testimony to the House Financial Services Committee. “The US must continue to innovate in this space so that it does not fall behind to pressure from international competition and digitization.”

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