- Central banks will begin to diverge in their use of technology in 2024, the Atlantic Council said.
- The US risks falling behind the EU, India, and China in the digital currency race.
- The Fed’s lack of innovation in the space could lead to a fractured future of currencies.
The US dollar has long been the dominant currency of the world, but that doesn’t guarantee the same will hold true as money turns increasingly digital.
To Atlantic Council researchers Josh Lipsky and Ananya Kumar, the Federal Reserve is already falling behind in the technology race.
Unlike the US, other world powers including China, India, Germany, Italy, and France have moved beyond the theoretical stage for central bank digital currencies (CBDC).
“A lot of central banks are investing heavily in innovation, some of the largest central banks in the world, but the US position has been much more cautious on this,” Lipsky told Business Insider in an interview. “But there is a risk here of falling behind, that would mean there’s less US input in standard setting.”
Lipsky, who is the senior director of the Atlantic Council’s GeoEconomics Center, said central banks around the globe are working to “future-proof” their currencies as blockchain technology, artificial intelligence, and quantum computing become more relevant — all of which, for better or worse, are poised to impact how people use money on a daily basis.
India, for one, has scaled up its digital rupee project to more than one million transactions per day processed by commercial banks, and China has been running pilot tests with the eYuan for several years. The European Central Bank, meanwhile, has various benchmarks for 2024 to test the digital euro with multiple member nations.
The Atlantic Council further illustrated the point by noting the People’s Bank of China deploys more than 300 people to its digital currency project, while the Fed commits fewer than 20.
In Lipsky’s view, it’s a miscalculation on the part of US policymakers to forgo paving the way in these advancements.
“The Fed is not bringing technological solutions to the table,” he said. “The miscalculation is thinking the dollar is the world’s reserve currency, so there’s not a need to innovate. I see that as a defensive posture, rather than a proactive one.”
To be sure, the US has deployed its long-awaited FedNow program, an interbank settlement system. But even that took years longer than similar projects overseas, and has debuted to limited fanfare. Experts warn it could take years more to become widely adopted.
A fractured future of money
New alternative financial systems are springing up across the world, including in China, that allow efficient cross-border transactions, though the US hasn’t emerged as a key player in the space, let alone a leader.
These projects take time to build and implement, Lipsky said, but once activated, the innovation and progress could be extremely quick.
If the US doesn’t emerge as an innovator, the Fed and US dollar could see its standing on the world stage diminish via trade, reserves, and sanctions strength, according to the Atlantic Council.
“The end-result of less Fed engagement here will be a fractured payment landscape,” Lipsky said. “Different models will proliferate from different countries, and that will create more friction. You could have a system that is less efficient and less secure. There won’t be a unification of the payment system globally, and that’s a US disadvantage.”