Federal Reserve Confident in the International Role of the Dollar

The Federal Reserve has published a paper on what happens to international payments and the role of the dollar should a US Central Bank Digital Currency (CBDC) be issued1. The paper describes why the US dollar is the world’s reserve currency, what needs changing to enhance cross-border payments and the impact of design choices on whether a CBDC is useful in international trade or not.

The paper argues that:

• The fundamentals that make the US dollar mighty won’t change and so it will remain preferred. Even if the US does not issue a CBDC and another major economy does, unless it replicates those underlying fundamentals, its impact will be limited.
• The sources of friction in the international payment system are primarily regulatory rather than technical. This means they may be solved by non-CBDC approaches.
• Design choices of a CBDC affect the different roles of money differently. Those design choices need to consider the policy goal of each role of money.