DFX.asia -- US Congress is divided on the introduction of a CBDC, fearing its effects on the dollar The US Congress looks divided on the introduction of a Central Bank Digital Currency (CBDC) in the States, fearing losses on deposits and its effects on the dollar and the US reserve status. But, above all, it fears the Chinese rush to avoid ‘dollarisation’.
However, to successfully undermine, parallel or replace the US dollar’s status as the world’s primary reserve currency, China’s CBDC would need to offer a viable alternative to conduct and settle cross-border payments, requiring connectivity and adoption in numerous other markets, according to the Congress.
“To achieve that, China, which is already engaged in competition with the US and Russia for resources, allies and status around the globe, is expected to leverage its market size and foreign aid, broadening the adoption of its currency, contributing to its Digital Silk Road initiative,” reported Congress.
Considerations about a US-sponsored CBDC also involve evaluating its effects on the reserve status. The imminent roll-out of the digital yuan, more than any other CBDC, is a concern and may be a factor in US decision-making about its own CBDC.
Reserve status and troubled asset purchasesIn recent years, episodes where the federal funds rate has briefly been misaligned with the Fed’s target rate, as well as stagnant economic growth despite sustained low-interest rates, have raised questions about the current state of monetary transmission.
The low-interest-rate environment may limit the ability of central banks to reduce policy interest rates enough to support the economy during a downturn.
CBDCs are a potentially effective method of monetary transmission since some versions of the concept could provide central banks with the ability to conduct direct monetary transfers, supplementing the effects of accommodative monetary policy. However, CBDCs could create transmission disruptions, according to the Fed.
Direct or indirect CBDC?CBDCs could also have implications for the traditional fractional reserve banking system depending on the roles of a nation’s central bank and private sector.
One-tier models, also called ‘direct CBDCs’, establish the central bank as the user-facing enterprise, providing accounts and customer services directly to retail customers. In contrast, two-tier systems, or indirect CBDCs, feature private financial services providers as an intermediary between retail customers and the central bank.
In a two-tier system, the payment service provider is responsible for furnishing customer accounts, including digital wallets, handling retail payments and maintaining compliance with financial crime obligations. This leaves the central bank to handle only the digital wholesale payments
Bank deposits and profits?Traditionally, banks and credit unions make money through maturity transformation, taking on short-term liabilities in the form of deposits and lending out that money in the form of longer-term assets, such as mortgages.
“The introduction of CBDCs could fundamentally disrupt this system since the financial institutions would not be able to use the CBDCs that would be stored in the wallets that they manage in a two-tier system or would not play a role whatsoever in a one-tier system,” reported Congress.
“Additionally, in certain situations, CBDCs could also pose a risk to financial stability in a system due to concerns around flights to safety in times of economic stress.”
In a system where there is no limit on the amount of CBDC that one person can control, individuals may move all their assets into CBDCs, which the government guarantees, potentially causing stress at financial institutions and within other segments of the financial system.
Among other things, this could have implications for deposit insurance and the bank resolution framework that prioritises retail depositors. Models can account for this possibility by limiting the amount of CBDC an individual can control or the overall amount in the system.
National security considerationsAccording to the Congressional Research Service: “About half of the international trade is invoiced in dollars, and about half of all international loans and global debt securities are denominated in dollars. In foreign exchange markets, where currencies are traded, dollars are involved in nearly 90% of all transactions.”
Cross-border payments systems that might compete with the current structure, including CBDCs, could facilitate sanctions evasion by giving sanctions targets access to opaque avenues for the flow of goods, services and funds, as the congress observed.
“These outlets from the pressure of sanctions could also undermine America’s ability to leverage sanctions as a foreign policy and national security tool. Recently, Iran has pursued bitcoin mining to evade sanctions, while Venezuela has attempted to launch its cryptocurrency, the Petro, to sidestep multilateral sanctions,” reported Congress.
Privacy and transparencyAccording to Congress, privacy transaction records, including an identifier of participants must be recorded to a digital ledger to prevent fraud and double-spending, ensuring that a unit of currency cannot be spent more than once.
A degree of transparency in financial transactions exists in global standards to combat money laundering, fraud, tax evasion, terror finance and other crimes like cyberattacks.
CBDC models will need to mirror or improve on current regimes, requiring CBDC systems, platforms, exchanges and other services to have an appropriate anti-money laundering and combating the financing of terrorism protections built into their technological and legal foundations...(Source:Currency_com)
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