US Congressman Stephen Lynch (D-MA) recently expressed concern about the potential impact of a US Central Bank digital currency (CBDC) on other cryptocurrencies. Lynch’s concerns are not unfounded, as a retail CBDC could compete with existing cryptocurrencies by offering greater efficiency and stability.
The US is too late for the party
As the congressman’s comments suggest, the US is lagging behind other countries in the race to launch a CBDC. Currently, 11 countries have already launched and almost 90 countries are testing, developing or researching a CBDC.
This slowdown could have significant implications for US economic competitiveness going forward.
Is a CBDC even necessary?
Fed Chairman Jay Powell has stated that the Fed has not yet determined whether the US needs a CBDC. This raises the question of why so many other countries have already embraced digital currencies.
Nevertheless, given the potential benefits, it’s hard to see why the United States wouldn’t want to create one. A CBDC can improve financial inclusion and efficiency and accelerate cross-border transactions.
Wholesale CBDC already under development
While a retail CBDC does not appear to be a priority for the Fed right now, the central bank is already developing a wholesale version (wCBDC). A wCBDC would be limited to bank-to-bank transactions rather than being available to the general public. The announcement of this development has sparked speculation about the possible impact on cryptocurrencies, especially Bitcoin.
Federal Reserve White Paper on Wholesale CBDC
The Fed’s white paper on Project Cedar outlines the goals of its wCBDC initiative. The project aims to improve the efficiency of wholesale payment systems by shortening settlement times and minimizing counterparty risks. While the wCBDC would not be available to retail customers, it could still have a significant impact on the wider cryptocurrency market.
Implications for cryptocurrencies
“You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies if you had a digital US currency,” said Fed Chairman Powell. “I think that’s one of the stronger arguments in his favor.”
A CBDC would offer a number of advantages over existing cryptocurrencies, including greater stability and lower volatility. As such, this could lead to a decrease in demand for other cryptocurrencies, which in turn could result in a drop in their value.
The government backs a CBDC with full confidence and credit, making cryptocurrencies instantly incomparable.
Competition or cooperation?
One possibility is that a CBDC and other cryptocurrencies could coexist, each serving different needs. Investors can use cryptocurrencies for speculative investments, while a CBDC can serve as a means of day-to-day transactions. It is also possible that CBDCs and cryptocurrencies could compete directly, with the former gradually replacing the latter.
The outcome of this competition will depend on a range of factors, including the perceived benefits of each technology and the regulatory environment in which they operate.
Concerns about regulations
The development of a CBDC raises a number of regulatory concerns. For example, regulators will have to guarantee the privacy and security of transactions. In addition, the development of a CBDC may disrupt existing payment systems and business models. Regulators will have to walk a fine line between innovation and stability, ensuring that the benefits are realized without unduly harming existing businesses and consumers.
The development of a large-scale CBDC by the Fed could be seen as a sign that the US is starting to take the technology seriously, as Congressman Lynch’s concerns about the impact on other cryptocurrencies are well founded.
Still, there are a number of unanswered questions about the need for a CBDC in the US and the potential impact it could have on the wider cryptocurrency market.
Develop or not?
Ultimately, the US will have to decide whether to develop a retail CBDC. Or risk falling behind in the dynamic digital currency landscape.
As the congressman rightly pointed out, a US digital currency could significantly impact the value and viability of other cryptocurrencies. The US government has not yet indicated whether it will take any action. Or they can continue to prioritize other financial initiatives.
The conversation will continue as more countries explore this technology and as the global financial system evolves.
BeInCrypto has reached out to the company or individual involved in the story to get an official statement on recent developments, but it has not yet heard back.