Over 100 countries are currently exploring Central Bank Digital Currencies (CBDCs), representing at least 95 per cent of the global economy.
CBDCs are the digital version of an official currency. A CBDC may or may not be backed by blockchain technology, but it offers a ‘sovereign guarantee' that crypto will not. However, like cryptos, a CBDC is expected to facilitate trust, safety, and liquidity.
According to a recent Deloitte report, the Asia Pacific region has been the “frontrunners” in CBDC projects. “Seven out of the top 10 CBDC projects are being conducted in the APAC region alone,” it noted.
China became the first major economy to launch a digital currency in 2021, while several developing countries are in various stages of experimentation.
As much as CBDC adoption is the story of developing countries gaining the first-mover advantage, it is also the story of at least one economic powerhouse missing out – the United States.
The US came out with its first comprehensive framework on digital assets (read CBDCs) in September 2022.
While analysing the benefits and downsides of a US CBDC, the reports urged the Federal Reserve “to continue its ongoing CBDC research, experimentation, and evaluation.”
On November 15, the New York Fed announced the launch of a proof-of-concept pilot project to see the feasibility of a CBDC, just days after releasing the results of its wholesale CBDC research titled ‘Project Cedar'.
The US' tryst with CBDCs came a fortnight after India's central bank began its pilot in the government securities market.
India is expected to launch a pilot retail version of CBDC in December, while the United States is still in the research phase and, according to the US Treasury Department, “could take years to develop” its CBDC.
The US lagging in CBDC development is surprising, given its pre-eminence as a technology innovator. Interestingly, two US researchers laid the theoretical framework for blockchain technology – Scott Stornetta and Stuart Haber. Satoshi Nakamoto, the presumed inventor of blockchain, referred to them in the first whitepaper.
Among the many factors for the US falling behind in the CBDC race could be the ‘innovator's dilemma', which refers to a dominant incumbent (the US in this case) being left behind due to a lack of investments in disruptive technologies.
“The dominant incumbent now faces a hard choice: whether to adopt or fight against these disruptive technologies—and if adopting, how to do so effectively,” a 2021 Brookings article noted.
The US' cautious approach towards CBDCs is confounding if one factor is China's looming threat dominating the financial system.
As one report in TIME magazine noted, developments in the digital currency space will not only impact the financial world but also bolster the geopolitical ambitions of countries.
With China and the US vying for the position of superpower, digital currencies are expected to play a major role in defining 21st Century trade and finance.
According to reports, China harbours ambitions to use its CBDC – digital yuan –– for global trade payments. China's move, therefore, can potentially undermine the US dollar's international dominance.
Nevertheless, whenever the US launches its own CBDC, it is expected to revamp the global economic system. Anmol Chawla, the co-founder of Taxcryp, said that CBDC would help the US maintain its economic dominance.
“The US wants continued domination of the dollar to protect its status as the world's reserve currency and ward off threats from countries like China,” he said.
Some experts, moreover, back the US' cautious approach towards CBDCs, arguing that the threats of volatility and hacking need to be investigated before a CBDC launch.
“The focus needs to be on the right solution to the market, not the first solution to the market,” said Yoda Regev, CEO of Qonetum Finance.