In Brief:
- The Federal Reserve has put forward digital currencies as a feasible challenge to dollar dominance.
- EU and Chinese governments are working on their own digital currencies.
According to the Federal Reserve, digital currencies are a feasible challenge to the dollar’s dominance in the international market.
According to the Document released by FED on digital currency, the shifting payment landscape poses a challenge to the U.S. dollar’s dominance. For example, with the rapid growth of digital currencies, both the private sector and the official could reduce reliance on the U.S. dollar.
Cryptocurrencies such as Bitcoin and Ethereum have created a parallel system for payment and finance. These systems are decentralized and remove the need for trust which makes them popular among international investors.
“The International Role of the U.S Dollar leaders of the Fed’s international finance department did not predict any removal of the U.S dollar from its privileged position in the foreseeable future,” said the writers, Carol Bertaut, Bastian von Beschwitz, Stephanie Curcuru.
Additionally, Increased European integration and rapid growth of China are also decreasing the dominance of the US dollar. The EU is planning to introduce its own digital currency while China has already developed a digital Renminbi known as e-CNY. However, with current regulation, the Chinese renminbi is unattractive to international investors as it shows until 2015-Q2
The possibility of new products could shift the balance of perceived costs helps to maintain the dollar’s leading role. “It also said that technology alone could alter the landscape enough to completely offset the long-standing reasons the dollar has been dominant,” the paper added.
According to the document, the Fed is looking forward to publishing a separate report on whether the US should issue CBDC. In July Jerome Powell, Federal Reserve chair commented that the U.S. Central Bank must introduce the digital dollar. He added that “you wouldn’t need Stablecoins, you wouldn’t need crypto if you had a digital U.S. currency.”
