Bank of America: Stablecoin adoption and the digital dollar are inevitable

    27 Jan 2022

    Bank of America analysts said in a report that a central bank digital currency (CBDC) would differ from digital currencies currently available because it would be the liability of the Federal Reserve, not a commercial bank. Analysts suggest that the United States is moving toward creating its own CBDC.

    According to a Bloomberg report, Bank of America crypto strategists Andrew Moss and Alkesh Shah wrote in a Monday note that CBDCs “are an inevitable evolution of today’s electronic currencies.”

    “We expect stablecoin adoption and use for payments to increase significantly over the next several years as financial institutions explore digital asset custody and trading solutions and as payments companies incorporate blockchain technology into their platforms,” the analysts noted.

    Bank of America also said in a report that a US central bank digital currency (CBDC) would differ from the digital money currently available to the public because it would be a liability of the US Federal Reserve, not a commercial bank, and so would have no credit or liquidity risk.

    Preserving the dollar’s status as the world’s reserve currency, improving cross-border payments, and increasing financial inclusion are all seen as benefits of a US digital currency, analysts led by Alkesh Shah wrote in the note Monday. The Fed published a discussion paper last week on the benefits and risks of a US CBDC.

    Potential risks – which could be diminished by CBDC design choices – include “changing the financial sector’s market structure by shifting deposits, increasing the liquidity risk of the financial system if deposits at commercial banks were converted to a CBDC and decreasing the efficacy of monetary policy implementation,” the note said.

    Bank of America said key considerations before issuing a CBDC are its need to be privacy-protected, intermediated, transferable, and identity-verified.

    Stablecoins are likely to see an increase in usage in the absence of CBDCs, the bank noted, adding that the two largest by market value, Tether and USD Coin, had a combined market value of around $121 billion as of January 21. In addition, the report said their use as a means of payment is increasing, particularly for cross-border remittances, as they are faster and cheaper than using fiat currency.

    In a report published earlier in the month, Bank of America challenged the Bank of England’s assertion that a UK CBDC would act just as a form of digital cash. Instead, it said CBDCs are likely to replace checking accounts as the way in which consumers hold the majority of their funds.

    According to the Atlantic Council, about 90 countries, led by China, are exploring or launching their own CBDCs, sparking concern among some that the United States will cede the dominance of the global financial system if it does not digitize the dollar, currently the global reserve currency.

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