The adoption of central bank digital currencies is 'inevitable' - though the US still has 2 problems to overcome, says Bank of America

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The adoption of central bank digital currencies is 'inevitable' - though the US still has 2 problems to overcome, says Bank of America
The Eccles Building Brooks Kraft/ Getty Images
  • The adoption of central bank digital currencies is "inevitable", according to Bank of America.
  • However, the US needs to solve two problems: how to include unbanked Americans and dealing with retail transfers across borders.
  • "Central banks have the power and the will to prevent a very bad outcome," the analysts said.

The adoption of central bank digital currencies is "inevitable" due to numerous apparent advantages, according to Bank of America, though the US still needs to overcome several challenges before there can be an effective rollout of a digital dollar.

Among the many upsides of well-designed CBDCs, according to economist Ethan Harris and currency strategist Athanasios Vamvakidisthere, one stands out: their almost instantaneous transactions at minimal costs no matter where in the world.

This was highlighted during the pandemic when stimulus payments went out to the bank accounts of millions of struggling Americans. A transfer via check would have been too slow while one via credit card would have been too costly.

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Still, the US must overcome two problems before a CBDC can be successfully rolled out, according BofA analysts.

First, it must figure out how to include around 5% of American households that do not have bank accounts and the roughly 21% that do not have credit or charge cards. Once the US has its CBDC, these individuals could be locked out of participating.

Second, it must work out if "digital wallets" are indeed the answer to expensive retail transfers across borders, especially with 3% of the adult population in the US not owning cell phones and 15% not owning smartphones.

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Still, central banks will likely be moving along two tracks going forward, the analysts said, which are improving the current payment system and developing new methods of payment.

"Central banks have the power and the will to prevent a very bad outcome," the analysts said. "They are not going to throw the baby out with the bathwater, but will retain control of the payments system and minimize the disruption to the flow of credit."

The analysts also said they are concerned that if CBDCs for major currencies are available internationally, these could "erode the monetary sovereignty of smaller countries."

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After all, CBDCs, particularly one backed by the US, in some ways are superior to bank accounts as a store of value, particularly during times of crisis, they said.

CBDC is a type of central bank liability - similar to the US dollar - issued in digital form, which could be used by the general public. It will have the full backing of the central bank although could be managed by designated private financial institutions.

Around 56 central banks are developing or considering digital currencies, according to the Bank for International Settlements, with China leading the race as it gradually rolls out its e-RMB.

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The Fed for its part in May revealed that it has taken further steps in exploring a digital currency and will be releasing a discussion paper this summer outlining its thinking on digital payments.

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