China appears on the verge of releasing its digital yuan while the United States digital dollar is still in the research stage—but in the race for CBDC dominance, is being first really everything?
Below are three key variables that indicate that the United States’ approach of—doing it right not first—creating their central bank digital currency (CBDC) may be a more strategic approach.
Central Bank Digital Currency
Central banks around the world are competing to be the first to release their central bank digital currencies (CBDC) as the world economy is being reshaped by the challenges of the COVID-19 pandemic.
CBDC’s represent the digital form of a nation’s fiat money (currency backed by trust or faith in the regulating government). As such, it is controlled directly by the country’s central bank and is backed by national credit and government power.
Despite being influenced by decentralized cryptocurrencies like Bitcoin, CBDC is more of a reaction to than an embrace of cryptocurrency, which central banks see more as a threat to be managed.
With the immense popularity of Bitcoin and the announcement of the launch of Facebook’s Libra last year, governments are beginning to realize the importance of protecting against these threats to the existing banking and finance industry.
According to reports, China has been the frontrunner, aggressively piloting its own DCEP (Digital Yuan) meanwhile, the United States has been off to a slow start with the Federal Reserve still in the preliminary research stage—assessing the positives and negatives of CBDC implementation.
But there are several reasons why the United States will likely still come out on top in the race for a digital state-backed sovereign currency.
CBDC has no First Mover Advantage
Being the first to market typically holds significant advantages particularly in free markets. Being first is often a huge stride towards brand dominance—this can be seen with cryptocurrency as well with Bitcoin. Despite a slew of technically superior blockchains emerging since the Bitcoin network went live, Bitcoin still benefits from being the first mover and its reputation and brand have no equal in the crypto sphere.
But the first-mover advantage is nullified for a monopolistic sector which the central banks, particularly the Federal Reserve, control. Central banks are not in competition with the free market and can offer risk-free legal tender something that even private stablecoins like Tether’s USDT cannot. There is no impetus for the FED to race in this regard as the product will be vastly superior to anything the free market could offer.
United States’ CBDC development may even benefit from being the last to launch—why not let the other central banks fix the bugs first. It is also not entirely true that the global balance will shift should the digital yuan be launched first as it is essential for America’s economy and fiscal policy that keeps the world spending in dollars, not the format of the money.
As Federal Reserve Chairman Jerome Powell concurs with this sentiment and said at a recent IMF panel:
“We have not made a decision to issue a CBDC, and we think there’s a great deal of work yet to be done. […] In fact, I actually do think that CBDC is one of those issues where it’s more important for the United States to get it right than it is to be first.”
CBDC’s Have Hidden Risks
Letting others go first is often a smart strategy. The launch of a CBDC by any government could be a potential minefield, and we would rather see out competitors set off a few explosions before we venture the path ourselves.
While economists speculate on what the effects of issuing a CBDC might be on traditional banking systems, the actual effects are unclear at this point. Many prominent economists believe CBDCs could increase the ability for customers to go on banking runs, particularly in unstable economic conditions like the COVID-19 crisis. What is to stop panicking depositors from fleeing banks into 100% safe central bank digital currency?
Fast Payments Already Exist in the US
During the same IMF panel in October, Fed Chair Jerome Powell also said:
“We have a highly banked population so that many—although not all—already have access to the electronic payments system.”
And this statement is very true, networks such as MasterCard Send, Visa Direct, and The Clearing House’s Real-Time Payments system are all blanketing the US with real-time, domestic, person-to-person payments.
While a CBDC or digital dollars would have been useful for the instant delivery of the COVID-19 stimulus aid packages to citizens, some who ended up waiting months for the $1,200 cheques—beyond a crisis, there is no immediate need for the central bank to have digital payments.
Additionally, the ISO 20022 uniform standard of global payments will also be enhancing the cost the speed of SWIFT which is set to make a huge comeback and the Federal Reserve’s has also already announced the development of its own 24/7 instant payments called FEDNow.
Conclusion
In addition to the above, just designing and maintaining a retail-facing payments system would be a political minefield and open up debates on freedom—with Libertarians wanting anonymous transactions but regulators demanding traceability.
The political left may posture for financial inclusion while the right may leverage the system to more heavily scrutinize immigrant welfare benefits.
Given all the list of possible complications, it seems that the Federal Reserve’s strategy to let the other central banks charge out first may be the smart decisions. By sitting back they can ensure that they are better prepared for the landmines that China may inevitably set off in their determination to be first.
In the race for CBDC dominance going last could hold all the advantages.