Wall Street banks brace for digital dollars as the next big disruptive force

Wall Street is warming up to the idea that the next big disruptive force on the horizon is central bank digital currencies, even though the Federal Reserve likely remains a few years away from developing its own.

Led by countries as large as China and as small as the Bahamas, digital money is drawing stronger interest as the future of an increasingly cashless society.

A digital dollar would resemble cryptocurrencies such as bitcoin or ethereum in some limited respects, but differ in important ways.

Rather than be a tradable asset with wildly fluctuating prices and limited use, the central bank digital currency would function more like dollars and have widespread acceptance. It also would be fully regulated and under a central authority.

Myriad questions remain before an institution as large as the Fed will wade in. But the momentum is building around the world.

Citigroup:

The race towards Digital Money 2.0 is on.

“A major move to introduce central bank digital currencies (CBDCs) could actually disrupt the financial system,” Chetan Ahya, chief economist at Morgan Stanley, said in a report for clients. “Efforts to introduce CBDCs are gaining momentum, with as many as 86% of the world’s central banks exploring digital currencies.”

Indeed, a 2020 survey from the Bank for International Settlements indicated that nearly every central bank in the world at least did some work on these digital currencies. Some 60% are working on “proof of concept” testing, though just 14% have actually launched a pilot program or are in development.

Several areas of worry

Along with the enthusiasm about a possible new horizon for the financial system has come concern over getting the implementation right.

Central bank digital currency advocates, conversely, cite multiple advantages. Paramount among those reasons is giving unbanked people access to the financial system.

There’s also a speed consideration. Transfer payments, such as those provided by governments to people during the Covid-19 crisis, would be made faster and easier if that money could be deposited directly into digital wallets.

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