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An analysis conducted by an expert at the Royal Bank of Canada (RBC) foresees that the U.S. Federal Reserve will adopt an incremental approach in its journey to craft a Central Bank Digital Currency (CBDC), commonly referred to as a digital dollar.

As detailed in a recent report, RBC analyst Atul Bhatia opines that instead of hastily introducing a fully-fledged retail and wholesale CBDC, the Federal Reserve is more inclined to adopt a cautious and gradual trajectory.

Bhatia stated, “We think the Federal Reserve will continue to emphasize incremental technology improvements versus a risky push to transform the payments infrastructure,”.

CBDCs hold the potential to revolutionize efficiencies beyond the scope of existing payment systems by simplifying the interplay among multiple intermediaries into a unified, central-bank-administered database capable of directly issuing digital currency to individual wallets. However, this technological leap comes hand in hand with specific risks.

“We think having a single point of failure for dollar payments in a world that uses the greenback for all manner of trade is a terrible idea,” Bhatia noted. “In one move, the U.S. would create an unparalleled target for hackers and thieves, not to mention terrorists or geopolitical rivals.”

Bhatia conveyed “despite the hype around CBDCs, we see a host of security, privacy, and governance concerns that we believe outweigh the theoretical gains on efficiency.” He added that “commercial bank accounts and physical cash are likely to remain at the center of U.S. financial architecture for the foreseeable future.” 

The Federal Reserve has been diligently evaluating the potential implications of introducing a CBDC, undertaking a series of studies, pilot trials, and experiments to comprehensively assess the technology and its inherent limitations.

Simultaneously, the U.S. central bank has already developed a real-time payment system known as FedNow. While resembling a CBDC in enabling instantaneous digital settlements, it exclusively functions among depository institutions and abstains from utilizing blockchain technology.

Benefits of CBDC Recognized

Bhatia highlighted the prevailing inefficiencies within existing financial settlement systems and pinpointed specific advantages that a digital dollar could introduce.

“Ownership records would be fully electronic and consolidated, making movements between accounts simple and instantaneous,” he elucidated. “In practice, individuals and businesses would likely have accounts directly at the Fed, and buying groceries, for instance, would simply involve a customer moving CBDC from its Fed account to the grocer’s.”

The analyst also contended that a CBDC could expedite transactions for large enterprises, integrate a larger population into the financial system, and mitigate counterparty risk.

“CBDCs offer faster and cheaper payments, allow people currently outside the traditional banking system access to financial infrastructure, and could reduce settlement risk and delays on international trade,” he concluded.