In the fast-paced evolution of global central banking, 2024 is set to witness a significant divergence among major central banks, not in terms of interest rates or quantitative easing, but in technology.
Over the past year, prominent central banks worldwide, such as the European Central Bank (ECB), the Bank of England, the Bank of Japan, the Reserve Bank of India, and the People’s Bank of China, have made substantial progress in developing central bank digital currencies (CBDCs) and rapid payment systems. Research by the Atlantic Council’s GeoEconomics Center reveals substantial advancements in India’s digital rupee project, with over one million daily transactions processed by commercial banks. In the eurozone, the ECB is entering the preparatory phase for its CBDC, unveiling a comprehensive roadmap for 2024, emphasizing collaboration with private sector entities on critical design aspects.
These global initiatives extend beyond CBDCs, incorporating investments in technology to future-proof currencies against the impacts of blockchain, artificial intelligence, and quantum computing—innovations poised to reshape how money is used, both legally and otherwise.
However, the United States Federal Reserve appears to be lagging behind its counterparts. A glaring indicator is the disparity in resources allocated to research and development. While the People’s Bank of China boasts over three hundred personnel dedicated to digital currency, the entire U.S. Federal Reserve system has fewer than twenty. The delayed introduction of FedNow, the anticipated interbank settlement system, further exemplifies the innovation gap, with slower development and limited early adoption.
Vice Chair of the Federal Reserve, Michael Barr, acknowledged on Bloomberg’s Odd Lots podcast that assessing the effectiveness of the FedNow system could take years. Yet, the urgency of the evolving financial landscape, particularly in areas like cross-border payments, demands swift action. The average cost of international remittances exceeded 6 percent in 2022, underscoring the need for an upgrade in the outdated financial payments architecture.
The prevailing sentiment within the Fed and Capitol Hill seems to be a reluctance to innovate, assuming the dollar requires no enhancement. This perspective, however, is a miscalculation.
To fortify its position as the issuer of the world’s reserve currency, the United States must proactively drive payment innovation. Leveraging its influence in international forums such as the International Monetary Fund, the G20, and the Committee on Payments and Markets Infrastructures, the U.S. can set standards and guide constructive developments. Failure to do so risks other entities filling the void, as exemplified by the proliferation of alternative financial plumbing systems globally.
Despite efforts by institutions like the Bank for International Settlements, the ECB, and the Reserve Bank of India, none can substitute for the world’s reserve currency issuer. Central bankers worldwide seek the Fed’s guidance on various issues, making its leadership crucial for fostering positive developments in privacy, cybersecurity, and technological expertise.
While progress is visible within U.S. universities and major companies exploring CBDCs, the absence of active involvement by the U.S. central bank in collaboration efforts raises concerns. Even regional Feds, such as the Federal Reserve Bank of New York, are engaged in important exploration but lack substantial updates on their initiatives.
If the Fed is silently working on these matters, it is insufficient. In an era of political polarization, the lack of public communication has fueled misinformation. The potential consequences include the construction of a fragmented global system lacking uniformity in design, cybersecurity standards, and messaging systems, jeopardizing the security of money.
The critics of CBDCs argue without sufficient evidence, emphasizing the need for pilot projects to address and answer these concerns. While the U.S. appears to be adopting a wait-and-see approach until after the November election, the rapidly evolving technological landscape demands immediate action. The gap between the Fed and its counterparts is likely to widen through 2024, necessitating accelerated exploration efforts on all payment projects, including cross-border transfers and CBDCs, to prevent the future of money from slipping away.
