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This article is more than 1 month old.

Digital dollar may threaten monetary sovereignty of poor nations: Raghuram Rajan

Mini

Rajan said wider adoption of the digital dollar, which will be easier to acquire and use than its fiat alternate, may have unintended consequences on local currencies due to a lack of confidence in the local macroeconomic policy.

Digital dollar may threaten monetary sovereignty of poor nations: Raghuram Rajan
Former Reserve Bank of India (RBI) governor Raghuram Rajan has warned the use of digital US dollars may impact poorer nations adversely. While the introduction of the digital dollar may provide much-needed financial services to many in poorer nations, where financial infrastructure is lacking, it may have unintended consequences, he said.
A readily available digital dollar may overtake local currencies posing a risk to monetary systems, Rajan, a Professor of Finance at the University of Chicago’s Booth School of Business, said.
In poorer nations, where the public has low faith in the macroeconomic policy of the nation, people may choose to use the easy-to-use digital currency instead of relying on the local fiat currency.
“That means that that country no longer has monetary sovereignty,” Rajan, who previously served as the IMF’s chief economist, said in a Bloomberg TV interview. “It has fewer tools to deal with economic growth.”
The US digital dollar is the latest experimentation from central banks towards Central Bank Digital Currencies (CBDCs). CBDCs are legal tender created by the central bank of a nation, though in the digital form. Unlike other cryptocurrencies that are decentralised financial tokens or DeFi, CBDCs will be backed by central reserves just like all other fiat currencies.


According to a 2021 survey by the Bank for International Settlements, 86 percent of central banks were actively researching the potential for CBDCs, 60 percent were experimenting with the technology and 14 percent were deploying pilot projects.
While China is leading the space with its e-Yuan pilot programme that it hopes to expand before the 2022 Beijing Winter Olympics, other countries have made progress as well. The US Federal Reserve announced in May that it would be looking into CBDCs, and the Fed is going to release its research publications sometime soon.
Rajan had previously stated that digital currencies like stablecoins and cross-country payments through cryptocurrencies held promise, but urged regulators to be abreast of the developments before they got out of hand.
“I think there will be use cases that will emerge -- stablecoins, properly regulated, have a future,” Rajan said at the Reuters Global Market Forums on August 25.
“I think some cryptos, even though they have fluctuating values, might find a way to become an effective means of payment. Cross-border payments is one area which is wide open, because of the huge transaction costs of making (such) payments,” said Rajan. The Reserve Bank of India is working on its own model of CBDC.


 
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