Wall Street Journal: Central bank digital currency may end US dollar hegemony

The Wall Street Journal issued a statement on Monday that global central banks are getting closer to issuing their own digital currencies, which will inevitably threaten the hegemony of the dollar.

The article said that the future of money may be a digital version of the cash in people's wallets, which may subvert the current monetary system. But such a future may disappoint many liberals and tech-savvy investors who pin their hopes on private cryptocurrencies such as Bitcoin.

Unlike them, central banks and governments are increasingly keen to launch “digital” national currencies. That is to say, they want to issue virtual currency without paper money or coins as an equivalent, and hope that it is generally accepted as a payment method.

The central bank, such as the Federal Reserve, has actually issued digital currency through commercial banks, and then commercial banks lend money to households and businesses electronically, enabling customers to make payments and receive payments digitally without having to trade cash.

But the central bank can not only operate through commercial banks, but it can also issue digital currency directly to the public. At present, countries are experimenting with the central bank's digital currency, which will have far-reaching significance.

For example, most current financial transactions involve settlement of payments through a series of systems, which means that it can take two to three days for funds to transfer between accounts. The national digital currency managed on a single network allows funds to be transferred almost immediately. For example, most bitcoin transactions can be completed in 10 minutes. With digital currency, transactions can be completed in real time and are less expensive or non-existent.

In addition, the digital currency issued by the central bank may undermine the role of commercial banks. This will raise some political issues, such as how the Fed should handle new electronic deposits held from consumers, including whether they should pay interest or make loans.

In addition, the central bank's digital currency may make private cryptocurrency difficult to popularize. Since the government's electronic cash will be directly operated, supported and controlled by the central bank, it may be more reliable than privately created cryptocurrencies, which operate on decentralized user networks and have fluctuating value.

And most importantly, the fiercely competitive central bank digital currency could trigger a new type of currency war. Since the 1920s, the dollar has been the main currency in the world. However, if national digital currencies allow for faster and cheaper cross-border transfers of funds, a viable alternative to the dollar may emerge.

Bank of England Governor Mark Carney said at the Fed's annual seminar in August that “technical development offers potential for the rise of such a world.” He highlighted the current dollar risk and envisioned a new multi-country support. Digital currency competes with the dollar.

One of the US dollar's rivals may be China's central bank digital currency, a digital version of the yuan that the People's Bank of China plans to issue later this year or next year, which could become the first major global currency to be digitized.

For the benefits of digitization, a survey conducted by the International Monetary Fund shows that cross-border remittances are not only faster and cheaper, but also provide more effective monetary policies, provide risk-free benefits, and pay networks to the public.

Carney also said at the seminar that the dollar will not be defeated overnight, but bank presidents should now consider the world of the post-dollar era, rather than waiting for a crisis to make passive changes.

But not all policymakers believe that digital currencies will compete with the dollar.

The United States has always been wary of the development of cryptocurrency. Federal Reserve Chairman Jerome Powell said this month that consumers already have a lot of payment options, and the cybersecurity risks associated with digital currencies are "quite huge." He pointed out that if hackers gain access to the system, they may steal money from the vault.

The Libra cryptocurrency proposed by social media giant Facebook highlights how Silicon Valley puts pressure on the central bank. Unlike other private cryptocurrencies, Facebook already has a network of 2 billion users, enough to support the consumer demand that drives private currency use.

Tobias Adrian, director of the IMF's currency and capital markets department, “even a central bank digital currency created by a major country or region may have few users and will not spread on social media platforms. Therefore, for things like Libra. The plan may be more destructive in nature."

This also poses a potential threat to the Fed, which needs to control the money supply to regulate inflation and stimulate the economy.

Jeremy Stein, a professor of economics at Harvard University and former chairman of the Federal Reserve, said: "No central bank wants this currency to become an uncontrolled currency. Libra, not the US dollar, cannot make monetary policy."

In China, mobile payment applications like Alipay are everywhere, and many domestic merchants have entered the digital world. This may be one of the reasons why the People's Bank of China digitizes its currency, the renminbi, faster than other central banks. Although it did not publicly comment, China Daily reported that the digital renminbi may be announced this year or next year.

The renminbi will be an important testing ground. In the past decade, its use in the world market has increased, and China has surpassed the United States to become the world's leading trading nation.

Eswar Prasad, a professor of economics at Cornell University and head of the China Department of the International Monetary Fund, said that for Chinese, the digitization of the renminbi is a way to get rid of US control. China’s goal is not necessarily to overthrow the dollar, but they want to give allies another option besides the dollar and create a system that will not be affected by the US.

But China's digital currency will be very different from Bitcoin, because the central bank will control the money supply and track the identity of users.

Travis Scher, vice president of investment at Digital Currency Group, said, “Ultimately, the government may perfectly monitor all the flow of funds in the entire economy. In a country like China, it is issuing its own digital currency and trying to transfer the entire economy to the digital world. In it, it will actually increase the demand for more private cryptocurrencies and digital currencies and create greater autonomy potential."

Carney warns that no matter what happens, it can cause confusion. In the early 20th century, when the dollar replaced the pound as the world's main reserve currency, economic turmoil and a world war destroyed Europe. He said, "History tells us that the process of transitioning to the new global reserve currency may not go smoothly."

Image source: pixabay

By Xiu MU

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