Bank of America: U.S. digital currency can protect dollar supremacy

A United States digital currency could be released as soon as 2025.

Bank of America: U.S. digital currency can protect dollar supremacy

A United States digital currency could be released as soon as 2025, Bank of America said today. Digital currencies are "eventually going to evolve" from today's electronic currencies, the bank said.

A report by the Bank of America on Monday, "U.S. CBDC: First Step in a Long Journey," suggests that a central bank digital currency (CBDC) differs from existing digital money available to the general public because the currency would belong to the Federal Reserve, which means it would have no credit or liquidity risks.

It also said that the U.S. would benefit from the introduction of a CBDC by keeping the dollar as the world's reserve currency, but did not explain how a digital currency would achieve this.

According to the report, the U.S. CBDC is expected between 2025 and 2030. There are many benefits of adopting a digital currency, including preserving the dollar's status as the world's reserve currency, improving cross-border payment efficiency (the average remittance cost for an amount of $200 in the US was 5.4% of the transaction value in Q2'21), increasing financial inclusion (5% of US households were unbanked as of 2019) and leveraging new use cases.

As with fiat currencies such as the pound sterling, euro, or dollar, CBDCs are digital versions of them.

Digital assets such as Bitcoin differ from them in that, even if they may utilize a type of blockchain network, they are typically backed by a central bank and hosted on private networks rather than public ones.

Globally, there is a growing interest in creating central bank digital currencies.

CBDC projects are already in place in some countries, such as China and the Bahamas. In the United States, however, their benefits are still being studied.

A CBDC could increase the liquidity risk of the financial system if commercial bank deposits are converted to a CBDC, according to the bank. A sudden change in the cash flow of a bank's customers could result in a cash shortage.

Moreover, a CBDC could "reduce the efficacy of monetary policy implementation," meaning the Fed would have to change how it prints and injects money into the financial system in order to stimulate the economy.

As a result, the bank suggests that U.S. officials should focus on making its CBDC a "privacy-protected" intermediary, meaning that private firms would have to build wallets for them, and transferable.

Additionally, CBDCs in the U.S. would have to undergo identity verification to combat crime, according to a report by Bank of America.

According to the report, China's CBDC is "most likely to become widely accepted and used within the next several years."