As the United States Federal Reserve (Fed) prepares to launch FedNow — arguably its wholesale central bank digital currency (CBDC) — many analysts and investors are closely watching the potential implications on the cryptocurrency market.
According to a recent video by finance YouTuber Morris Invest, the FedNow program aims to replace paper currency with a digital U.S. dollar, bringing the nation one step closer to a cashless society.
This development comes amidst increasing challenges to the dominance of the U.S. dollar by China and Russia. The decline of the U.S. dollar is forecast due to falling oil transactions and reliance on these countries for minerals necessary for electric vehicle production.
As a result, investors are looking for new opportunities in the emerging digital economy.
CBDCs, like the digital U.S. dollar proposed by the FedNow program, are digital forms of sovereign currency issued and regulated by a country’s central bank. In contrast, cryptocurrencies such as bitcoin and ethereum are decentralized digital assets that operate on a peer-to-peer network, free from government control and oversight.
These CBDCs can be classified into two main categories: retail CBDCs and wholesale CBDCs.
Retail CBDCs are digital currencies aimed at the general public, including individuals, businesses, and other non-financial institutions. They serve as a direct replacement for physical cash and can be used for everyday transactions, such as buying goods and services or making peer-to-peer payments.
Retail CBDCs are intended to provide a risk-free, efficient, and inclusive means of payment for all members of society.
Wholesale CBDCs, on the other hand, are digital currencies designed exclusively for use by financial institutions, such as commercial banks and central banks, in interbank transactions and large-value payment systems. They serve as a digital alternative to traditional central bank reserves and facilitate more efficient and secure settlement of large transactions.
While both a retail CBDC and a wholesale one such as FedNow are expected to result in instant and presumably cheaper transfers for end users there is a major difference between the two.
A retail CBDC could be transferred from one user to another without going through a private bank: the end user holding the CBDC would be effectively holding an account at the central bank itself.
The introduction of a CBDC could have several implications for the cryptocurrency market including:
- Increased regulation: As governments adopt digital currencies, regulatory scrutiny of the cryptocurrency market is likely to increase. This could lead to more stringent rules and oversight, potentially stifling innovation in the sector.
- Wider adoption of digital currencies: A digital U.S. dollar could help familiarize the public with the concept of digital currencies, potentially increasing adoption and acceptance of cryptocurrencies in the long run.
- Competition between CBDCs and cryptocurrencies: The digital U.S. dollar and other CBDCs may compete with some applications of cryptocurrencies or stablecoins. However, cryptocurrencies with unique value propositions, such as privacy features or decentralized finance (DeFi) applications, could continue to thrive and even thrive in the closely-monitored financial landscape of CBDCs.
In conclusion, the FedNow program and the rise of CBDCs may pose both challenges and opportunities for the cryptocurrency market. As governments around the world continue to explore digital currencies, it is crucial for investors and market participants to stay informed and adapt to the rapidly changing landscape.