Crypto Has Arrived- Why The U.S. Needs To Embrace It

Given the recent release of the whitepaper from the Federal Reserve analyzing the pros and cons of a U.S. central bank digital currency (CBDC), it seems a good time to take a fresh look at this issue. Since multiple countries around the world have already launched, or are in the process of launching, CBDCs the question has to be asked; why does the United States seem to be behind in this area? The technological arguments have been addressed – blockchain and the cryptoassets that run on top of it do provide quantifiable savings and benefits – so why the hesitation?

There are any number of reasons why the U.S. might want to take its time with the issuance of a CBDC, but one is of paramount importance; the role of the dollar as the global reserve currency. Serving as the global reserve currency provides the United States, setting aside hyperbole or other machinations, provides the United States with an unparalleled economic advantage over every other nation. Such an advantage, however, is not guaranteed nor ensured going forward, and it is imperative that policymakers understand the pros and cons of a CBDC project, as well as the implications this will have for the broader economy.

Let’s take a look and dive into some of the factors that should be considered moving forward by the Federal Reserve, and any other policymakers seeking to integrate crypto and blockchain into the payment system.

Convenience is key. In order for any CBDC to achieve mainstream adoption it will have to be able to be used on an everyday basis and it will need to interoperate with other technology and payment platforms. For cryptoassets to truly evolve into cryptocurrencies, and be used on an everyday basis for purchases and transactions of all kinds they are going to have to be convenient to use.

In other words it has to be as easy and simple to use a cryptocurrency for transactions as it is to use fiat (current) currencies. If the process and steps in order to utilize a cryptocurrency, be it a CBDC or not is too complicated, the project will not succeed. CBDCs will need to be, and will be, easy and convenient to use.

Security is essential. Building on that first point it will be imperative that the security around these cryptoasset transactions are secure. The number of hacks, breaches, and other unethical activities that have occurred at cryptocurrency exchanges and platforms are innumerable in nature and have caused billions in investor losses. Such incidents might make headlines and there is reason for this; investors should take notice.

If a CBDC is to be used as a medium of exchange it is going to have to be a secure medium of exchange, and it will have to be trusted. In other words the individuals and institutions using this cryptoasset are going to have to trust it, and this involves two distinct components. Firstly, any CBDC will need to have the stability associated with current fiat currencies. Secondly, these currency tools must be able to convince consumers that if any hacks or breaches happen there will be a backstop or method by which consumers will be compensated.

Stability is key. Building on the previous points centered around security and convenience, it is absolutely imperative that any proposed CBDC actually operates as advertised vis-à-vis its stability. Users, be they individual or intuitional in nature, are not going to be interested in using a cryptocurrency that has excessive volatility. This is why, setting all other arguments to the side, bitcoin and other more volatile cryptocurrencies have not been used for transitional purposes as of yet.

A strong, and some would argue, the primary upside associated with CBDCs is the price stability and lower volatility linked to these instruments. Akin to how nations must carefully manage the value of fiat currencies, it is going to be expected that nations will manage the value and stability of a CBDC. Consumers and users, across the board, will expect and demand that any tool that is developed and put forward as a replacement or augmentation of existing currencies, will have stability and usability similar to existing options.

The development and launching a CBDCs the world over has led to vigorous conversations with strong opinions on both sides of the issue, but the reality is that these assets and instruments have fully arrived. CBDCs are here, are already being traded and used in the wider marketplace, and as this iteration of cryptoasset continue to develop and mature it is imperative all participants – individual, institutional, investors, and issuers are well informed as to how these instruments should operate and function. Cryptoassets are part of the mainstream, will continue to be a part of the broader economic conversation, and the market would be well served to pay attention to this fast moving and rapidly growing asset class.