The U.S. dollar could lose its status as the world’s reserve currency as more countries move towards launching their own digital currencies, following the lead of the BRICS bloc.
BRICS, which comprises Brazil, Russia, India, China and South Africa, is expected to launch a common digital currency by the end of 2023, backed by gold and other reserves. The initiative aims to reduce the reliance on the U.S. dollar for trade and investment among emerging economies.
The U.S. dollar currently dominates the global financial system, accounting for about 60% of the world’s foreign exchange reserves and 40% of global payments. However, this could change as 130 countries out of 195 are exploring or developing their own Central Bank Digital Currencies (CBDCs), according to a recent report by the Bank for International Settlements (BIS).
CBDCs are digital forms of fiat money issued by the central bank of a country. Unlike cryptocurrencies, CBDCs are centralized and regulated by the authorities. CBDCs aim to provide faster, cheaper and more secure transactions than traditional payment systems.
Some of the countries leading the way in CBDC development are China, Sweden and the Bahamas, which have already launched pilot projects or trials. The BIS report also found that 86% of central banks are actively researching CBDCs, and 60% are experimenting with them.
The main drivers for CBDC adoption are financial inclusion, efficiency, resilience and innovation. CBDCs can potentially offer greater access to financial services for the unbanked and underbanked populations, lower transaction costs and risks, enhance cross-border payments and remittances, and foster competition and innovation in the digital economy.
However, CBDCs also pose significant challenges and risks for central banks, such as cyberattacks, privacy issues, monetary policy implications, legal frameworks and coordination problems. Moreover, CBDCs could undermine the role of commercial banks in intermediating funds and providing credit to the economy.
The U.S. Federal Reserve has been cautious about issuing a digital dollar, citing technical and policy hurdles as well as potential negative impacts on financial stability and inclusion. The Fed is currently collaborating with MIT to research the feasibility of a CBDC, but has not committed to launching one anytime soon.
The U.S. dollar’s status as the world’s reserve currency gives it a unique advantage in terms of economic power and influence. However, as more countries move towards CBDCs, the U.S. dollar could face increasing competition and pressure from other digital currencies that offer more convenience and efficiency for global transactions.