Fed conference hears stablecoins could boost USD as global reserve currency

A memo released at a recent conference by the United States Federal Reserve found that the majority of exports believed that a US dollar central bank digital currency (CBDC) would not drastically change the global monetary ecosystem.

Panelists at the conference also said that the development of CBDC outside the US does not threaten the status of the dollar, but that the development of cryptocurrencies could change the global role of the dollar, and some stablecoins could increase the role of the US dollar globally. the dominant reserve currency.

The assessments came from expert panelists at a conference on “International Roles of the U.S. dollar” hosted by the Federal Reserve on June 16 and 17, and were collected in a memo and published by the Fed on July 5. The conference was used to gain insights from policy makers. , researchers and market experts to understand “potential factors that could change the dominance of the US dollar in the future,” including new technologies and payment systems.

A discussion on a panel that looked at digital assets and whether CBDCs would provide an advantage for the dollar if the panelists agreed that the supporting technology alone would not “result in fundamental changes in the global currency ecosystem.”

Speakers at the panel included Neha Narula, director of MIT digital currency initiative, Hyun Song Shin, head of research at Bank of International Settlements, Rebecca Patterson, chief investment strategist at asset management firm Bridgewater, and Paul Mackel, head of FX research at HSBC bank.

Panelists agreed that factors such as market and political stability, along with market depth, are more important for dominant reserve currencies such as the US dollar, where a Fed issues a digital dollar.

The development of CBDCs by other countries was also generally agreed by the panel that that country tends to focus more on its domestic retail market and therefore “is not a threat to the international status of the US dollar”.

The Federal Reserve noted that the amount and scope of CBDCs for making cross-border payments are “still quite limited”, suggesting that these systems do not yet pose a threat to the dollar, which makes up the majority of international financial transactions. October 2021 note.

Focusing on cryptocurrencies, panelists said that the further development of digital assets could change the international role of the dollar, but its adoption by institutional investors is constrained by an incomplete regulatory framework, causing the current crypto market to be dominated by speculative retail investors.

Another panel, including Fed financial research adviser Asani Sarkar and finance professor Jiakai Chen, cited BTC prices as premium in Chinese trading, concluding that some of the demand for crypto, particularly Bitcoin (BTC), is driven by the desire to escape domestic capital controls. compared to other countries.

Despite this, the Fed said that panelists do not see crypto as a threat to the dollar’s global role in the short term. Some have even suggested that in the “medium term”, crypto could strengthen the role of the dollar if “new sets of services structured around these assets are tied to the dollar,” possibly referring to stablecoins, which are cryptocurrencies pegged to the value of a fiat currency (usually USD.)

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The panelists’ advice can help bring a new perspective on things for members of the Federal Reserve.

Earlier, the Federal Reserve Board of Directors said in June that stablecoins that are not adequately supported by liquid assets and appropriate regulatory standards “pose a risk to investors and potentially to the financial system,” possibly referring to the collapse of TerraUSD Classic (USTC).

The board’s comment preceded Federal Reserve chair Jerome Powell’s remark that a CBDC could “potentially help protect the dollar’s international position.”

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