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US at risk of losing digital currency race

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The Fed is falling behind the rest of the world

This week brought two pieces of digital currency-related news. In covered bonds, Société Générale’s Forge oversaw the execution of the first digital currency repos of covered bonds. In the sovereign market, Euroclear completed an experiment with the Banque de France in which it executed a whole series of primary and secondary market OAT transactions on a blockchain, with the cash legs of the transaction paid in digital euros provided for the experiment by Banque de France.

What did they have in common? The euro.

But it’s not just Europe. China’s digital yuan project is racing ahead, and central banks all over the world are scrambling to keep up, launching their own projects.

The exception is the dollar. The Federal Reserve remains sceptical of the value of a central bank digital currency. It did commit to launching a review of the benefits and risks this week, but the ECB’s digital euro investigation project began three months ago.

What’s more, the Banque de France is already well advanced in experiments and knowledge gathering on the ECB’s behalf. Indeed, the ECB’s investigation is focusing on “a possible functional design that is based on users’ needs” not a review of benefits and risks, as the Fed’s will.

There are reasons to be sceptical of the benefits promised by CBDCs, and cautious about the potential risks. However, the present dollar payments network is looking increasingly outdated.

It is working on FedNow — an instant interbank payments service aiming for launch in 2023 — but the fact is that the market is already developing the infrastructure for operating with central bank digital currencies. Even if the Fed is right, and it’s not the best option, the movement could still reach a critical mass where everyone has to follow suit.

Europe is developing the same kind of lead over dollars in digital finance that it has in ESG finance. The dollar risks falling further behind other global currencies if it doesn’t catch up. It won’t be long before business starts being done in euros that would previously have been done in dollars.