Over 100 countries exploring CBDCs

Over 100 countries are currently exploring the Central Bank Digital Currencies CBDCs, which represent 95 per cent of the global economy.

CBDCs are the digital version of an official currency. A CBDC may not be backed by the technology, but it is a sovereign guarantee that will not be provided by aCryptocurrency. Like cryptocurrencies, a CBDC is expected to facilitate trust, safety, and liquidity.

According to a recent Deloitte report, the Asia Pacific region has been the frontrunners in the CBDC projects. It noted that seven out of the top 10 CBDC projects are being conducted in the APAC region.

China became the first major economy to launch a digital currency in 2021, while several developing countries are in various stages of experimentation.

As much as the adoption of CBDC is the story of developing countries gaining the first-mover advantage, it is also the story of one economic powerhouse missing the United States.

The US came out with its first comprehensive framework on digital assets, read CBDCs, in September 2022.

The Federal Reserve should continue its ongoing research, experimentation and evaluation while analysing the benefits and downsides of a US CBDC. The New York Fed announced on November 15 the launch of a proof-of- concept pilot project to evaluate the feasibility of a CBDC, just days after the results of its wholesale CBDC research titled Project Cedar were released.

The US tried to get rid of CBDCs a week after India's central bank began its pilot in the government securities market.

India is expected to launch a pilot retail version of CBDC in December, while the US is still in the research phase and could take years to develop its CBDC, according to the US Treasury Department.

The US is lagging in the development of CBDC, which is surprising, given its pre-eminence as a technology innovator. Two US researchers laid the theoretical framework for the technology Scott Stornetta and Stuart Haber. Satoshi Nakamoto, the presumed inventor of the digital ledger, referred to them in the first whitepaper.

The innovator's dilemma refers to a dominant incumbent in the US, left behind due to lack of investments in disruptive technologies, and could be one of the main factors for the US falling behind in the CBDC race.

The incumbent now faces a hard decision: whether to fight or adopt against these disruptive technologies, and if adopting how to do so effectively, according to a 2021 Brookings article.

The US cautious approach to CBDCs is confounding when one factor is China's looming threat dominating the financial system.

According to a report in the TIME magazine, developments in the digital currency space will not only affect the financial world, but will also boost the geopolitical ambitions of countries.

Digital currencies are expected to play a major role in defining 21st century trade and finance with China and the US competing for the position of superpower.

China wants to use its digital yuan for global trade payments, according to reports. China's move could undermine the US dollar's international dominance.

The US will revamp the global economic system when it launches its own CBDC. Anmol Chawla, the co-founder of Taxcryp, said that CBDC would help the US maintain its economic dominance.

The US wants to protect its status as the world's reserve currency and ward off threats from countries like China, he said.

Some experts back the US approach to CBDCs, arguing that the threats of hacking and volatility need to be investigated before a CBDC launch.