The Federal Reserve System's recent exploration into a central bank digital currency (CBDC) for the U.S. aligns with a global trend, with over 90% of central banks considering their own CBDCs. The research paper by senior economic analysts outlines the potential benefits of a U.S. CBDC, like increasing the dollar's international dominance, while also pointing out risks like increased centralization and privacy concerns.
Meanwhile, the International Monetary Fund (IMF) discussed the unique needs of Pacific Island countries for digital currencies, advocating for a more cautious approach when it comes to adoption due to macroeconomic risks and infrastructural challenges. Additionally, the partnership between BTG Pactual and Crypto.com introduces the BTG Dol stablecoin to the Latin American market, aiming to bridge the gap between traditional banking and the digital asset landscape.
Pros and Cons of a U.S. Digital Dollar
The Federal Reserve System's Board of Governors recently explored the implications of creating a central bank digital currency (CBDC) in the United States, as outlined in a new research paper by two senior economic analysts. This paper delves a bit deeper into the potential benefits and drawbacks of introducing a U.S. CBDC in response to developments by other countries. CBDCs, being digital currencies backed by the state, offer a modern approach to financial transactions. Some argue that a U.S. CBDC could boost the dollar's dominance on the international stage, ensuring it remains the top currency for global transactions.
However, critics have also raised some concerns about the risks associated with CBDCs, like increased centralization, privacy invasion, and the government's enhanced ability to freeze assets. The research paper indicates that over 90% of central banks worldwide are considering CBDCs, with the Federal Reserve examining how a U.S. CBDC could impact the dollar's international role. The main concern is whether the dollar can maintain its competitive edge without its own CBDC, especially in international payments.
The paper suggests that while the U.S. dollar is unlikely to lose its status as a primary unit of account or store of value, its position as the preferred medium of exchange could be threatened by foreign CBDCs or stablecoins if the U.S. does not issue an attractive CBDC option. The topic of CBDCs has sparked quite the debate among U.S. politicians, with former President Donald Trump and a group of senators expressing opposition to the concept.
A recent poll also revealed that only a small fraction of the U.S. population actually supports the idea of a CBDC.
Digital Currencies in the Pacific
In a recent paper, the International Monetary Fund (IMF) highlighted the unique currency needs of Pacific Island countries (PICs) due to their small size, diversity, and geographical isolation. The IMF pointed out that digital currencies could effectively meet these needs if designed appropriately. However, it still cautioned against adopting unbacked cryptocurrencies as national currency due to their potential macroeconomic risks and poor functionality as payment methods.
The report shed some light on the challenges faced by PICs, including a high dependence on remittances, vulnerability to reduced correspondent banking services, and the risk of running afoul of international Anti-Money Laundering efforts due to inadequate controls. The IMF also pointed out the variability among PICs in terms of local financial infrastructure development and the existence of their own fiat currencies, with some lacking any financial infrastructure whatsoever.
Given the predominant trade relations of PICs with larger countries outside the region, the IMF advocated for a regional approach to digital money. This strategy would help address issues like scalability constraints and economic volatility. However, the path to digitization is acknowledged to be a long one for some PICs, especially those without internet connectivity.
The presence of cryptocurrencies in PICs was acknowledged, but the IMF dismissed their suitability, calling poor substitutes for traditional means of payment and highlighting the additional macroeconomic risks they pose. The report mentioned that some PICs might be more inclined towards currency substitution with crypto assets and stablecoins due to weak confidence in their domestic monetary systems and the absence of other publicly supported digital assets, like CBDCs.
The IMF's recommendations for digital solutions in PICs mostly emphasized the need for offline functionality to cater to areas with low connectivity, extensive data collection to ensure the sustainability of business models, and some improvements to already existing systems to enable interoperability and programmability of digital money.
Overall, the IMF mainly pushed for a cautious and deliberate approach towards adopting digital currency in PICs, reflecting its previous views on digital currency technologies in the region. This includes opposition to the Marshall Islands’ legalization of decentralized autonomous organizations (DAOs) and advising against the premature introduction of a CBDC because of concerns over readiness and potential risks.
BTG Dol Stablecoin Debuts on Crypto.com
Meanwhile, BTG Pactual, one of the largest banking institutions in Latin America, formed a partnership with Crypto.com to boost the integration of cryptocurrency into the banking sector in the region. The collaboration was revealed on Feb. 27 when Crypto.com announced it would list BTG Pactual’s BTG Dol, a stablecoin pegged to the US dollar on a 1:1 ratio. The listing is part of an initiative to promote the use of the new stablecoins by pairing them with major cryptos like Bitcoin (BTC) and Ethereum (ETH).
This partnership aims to bridge the gap between traditional and digital finance, giving users in Latin America better access to the digital asset landscape. BTG Pactual's move into the crypto space began with the launch of their crypto tech platform, Mynt, in April of 2023, aimed at facilitating crypto investments for their clients. The BTG Dol stablecoin, in particular, was designed to give investors a safer and more straightforward way to invest in dollars.
Crypto.com’s COO, Eric Anziani, shared his optimism about the partnership's potential to empower the Latin American economy, highlighting the region's great growth potential in the digital economy. The collaboration also reinforces Crypto.com’s commitment to the Latin American market, especially after its acquisition of a payment institution license from Brazil's central bank in 2022.
