JPMorgan believes the CBDC could pose a threat to the global hegemony of the US dollar

5 Jun, 2020 08:55
source: Singularity Financial

Singularity Financial Hong Kong June 5, 2020 – JPMorgan believes the central bank digital currencies, or CBDC, could pose a threat to the global hegemony of the US dollar.

As the idea of central bank digital currencies starts to gain traction, the U.S. in particular needs to pay attention or risk losing a major aspect of its geopolitical power, according to JPMorgan Chase & Co.

While JPMorgan doubts the dollar will be displaced as the global reserve currency soon, the report warns that “fragile” peripheral aspects of the currency’s dominance may be eroded, including trade finance and the SWIFT messaging system.

Even an aligned power like the European Union might want to reduce U.S. sway over global payment systems, the analysts said. They pointed to SWIFT suspending access for some Iranian banks in 2018, which arguably might have been a violation of EU laws.

The report advocates that the U.S. launch a digital dollar project in order to migrate its monetary dominance into the rapidly growing digital sphere.

JPMorgan warns that other countries could use digital currencies to circumvent the SWIFT system and the reach of economic sanctions, undermining the ability for the United States to exercise power on a global stage through control over the global reserve currency.

During March, eight major banks including HSBC and Citi announced that a collaboratively developed blockchain trade finance will see a commercial launch in Singapore during the second half of 2020.

Blockchain-based trade finance initiatives have also been launched in China, Oman, and Europe.

If other countries were able to circumvent the SWIFT system and the dollar’s domination, it would be much more difficult for the U.S. to carry out its goals in sanctions and terrorist-financing enforcement, the report said.

“Offering a cross-border payments solution built on top of a digital dollar would, particularly if designed to be minimally disruptive to the structure of the domestic financial system, be a very modest investment to protect a key means to project power in the global economy,” they said. “For high-income countries and the U.S. in particular, digital currency is an exercise in geopolitical risk management.”

Digital Dollar Project Releases White Paper on US CBDC

On May 29, 2020, the Digital Dollar Project, an organization seeking to advance the development of a United States central bank digital currency (CBDC), published a detailed white paper entitled “Exploring a US CBDC.”  The white paper posits that if the US dollar is to remain the world’s primary reserve currency, it cannot remain an analog instrument and unit of account for assets increasingly denominated as digital tokens. Instead, the white paper reasons that the dollar must itself become a digital tokenized currency that measures, supports, and transacts with other digital assets.

After examining the theoretical underpinnings of CBDCs and the tokenization process generally, the white paper makes the case for a tokenized digital dollar. Notably, the white paper identifies eight central characteristics, or tenets, of a US CBDC:

Tokenization: A digital dollar will be a tokenized form of the US dollar.

Third format of currency: A digital dollar will operate alongside existing fiat currency and commercial bank money. It will mirror many properties of physical money, including its ability to work alongside existing account-based systems.

Maintenance of the two-tiered banking system: A digital dollar will be distributed through the existing two-tiered architecture of commercial banks and regulated intermediaries.

Privacy: The digital dollar will support a balance between individual privacy rights and necessary compliance and regulatory processes, decided upon by policymakers and ultimately reflecting the jurisprudence around the Fourth Amendment.

Monetary policy neutral: A digital dollar will not impact the Federal Reserve’s ability to affect monetary policy and control inflation. A digital dollar could act as a new policy tool.

Technology decisions and design choices driven by functional needs: The policy and economic requirements of a digital dollar will inform both the underlying technology and ultimate design choices.

Future proofing the architecture through flexibility: The chosen technological architecture will offer the flexibility to adapt configurability based on policy and economic considerations.

Continued private sector innovation: A digital dollar will act as a catalyst for innovation and will not be antithetical to the development of private sector initiatives.

The white paper also identifies a series of use cases for a US CBDC, including domestic peer-to-peer and retail payments, cross-border payments and remittances, benefits administration, and one-time or other exceptional government relief payments. The white paper concludes with the belief that exploring a “well-architected, durable, and universal digital dollar is in the national interest.”