Fed digital dollar won’t be available until ‘2025 to 2030,’ strategist says

Alkesh Shah, Bank of America Global Research Head of Digital Asset Strategy, joins Yahoo Finance Live to discuss the challenges of the U.S. adopting a central bank digital currency, weighing digital currency transactions against those of the traditional dollar, and the outlook for stablecoins from the Fed's perspective.

Video transcript

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- It's not imminent. But our next guest says the US adoption of a digital currency is on the horizon. Here with more on the risks and benefits, Alkesh Shah, Bank of America Global Research head of digital asset strategy. Alkesh, thanks so much for being here.

So realistically, how far away are we from a digital dollar, because the Fed just issued a paper on it? But they kicked it over to Congress, where, as you know, things can move slowly.

ALKESH SHAH: Yep. So it's not near-term. There's some work to be done, especially to figure out considerations like privacy, the current banking system, how to make sure that, you know, liquidity is maintaining the banking system. We really think, even though we think the digital dollar is inevitable, that it's probably not till 2025 to 2030.

- And then what are the key considerations before issuing a Central Bank Digital Currency, or CBDC?

ALKESH SHAH: Sure. So I think one of the most important considerations that central banks around the world are working through, including the Federal Reserve, is privacy. So when you have a digital asset or a digital currency that runs on the blockchain, which is the underlying technologies of these digital assets, all of the transactions are available to be seen.

Now, in the case of a central bank digital currency, like a digital dollar, it probably won't be open to everybody. But the government will be able to see it. And the government also needs to preserve the privacy of its citizens, or at least have a process where not just anybody can take a look at it, right? And so that-- those rules and processes need to be in place to preserve citizen privacy before a digital dollar could actually come out.

So that's probably one of the most important considerations. The second consideration that-- and, you know, the Federal Reserve, in their statement, listed a few of them. But the second most important one is really ensuring that our banking system continues to work as well as it does. Today, banks get deposits. They lend it out. They help the economy grow.

You know, if the Federal Reserve issued a wallet for its digital dollar, potentially, banking deposits could move to that wallet and leave banks-- not all of it. But, you know, even a few percent leaving could affect the economy. And so the Federal Reserve needs to take that into account, consider those aspects of it, and decide exactly how they issue those wallets for that digital dollar.

Potentially, they could have the banks issue the wallets, hold the wallets. So this way, it doesn't affect the flow of payments and liquidity. And so really, those are probably the two most important considerations. The Federal Reserve statement mentioned a few others. But I think those are the two most important.

- And then does it actually help or hurt the dollar's position as a reserve currency? And then what are some of the benefits and disadvantages of it?

ALKESH SHAH: Sure. So today, the dollar is the world's reserve currency. It is the most liquid. It's the most used for payments. And as other central banks offer digital dollars and the benefits-- sorry, digital currencies and the benefits that digital currencies offer, there is the chance that the dollar would become less the world's reserve by not having a digital dollar. And so that's one of the reasons why, you know, it is important in order to maintain our status as the world's reserve currency to eventually have a digital dollar.

And the reason why digital currencies are so interesting and so important and why central banks are doing it is-- one of the reasons is payments. Today, if you make a payment cross-border, it can take days to settle, whereas with a digital currency, it's almost real-time. And so if another central bank offered a digital currency and that began to be used, that's where it would impact the dollar if we didn't also have a digital currency.

- And then I'm wondering about stablecoins that are pegged to the dollar or other fiat currencies. Do you think those gain traction in the meantime? And what kind of regulatory pressures do they face?

ALKESH SHAH: Yeah. So stablecoins, you know, are a somewhat new phenomenon. But they've grown significantly in use. So, you know, people first started hearing about stablecoins when Facebook came out with Libra as an idea. That really didn't go very far. Since then, though, other companies have issued stablecoins backed by dollar and other reserves to be, you know, similar to a dollar. And they've grown significantly in transactions.

So to give you a sense, you know, last year, every quarter, you had almost a trillion and a half dollars of transactions of stablecoins. That's up from $250 billion a quarter in 2020. So you had almost a 6x increase in transaction volume of stablecoins in terms of use for payments and for trading digital assets. And this year, we're on track to potentially do a trillion dollars of transactions of stablecoins a month.

And so the adoption of stablecoins is significantly growing. And the reason why is just as I had mentioned as an example for a digital currency. If you use a stablecoin for a payment, it's almost real-time. And it's much less expensive. So right now, to do a cross-border remittance of, say, $200, it can cost you up to 5% of that $200 to make that transfer, whereas with a stablecoin, it's virtually free. And so using a stablecoin in payments is definitely something that could see near-term and intermediate-term adoption until, eventually, we have digital currencies. And then, potentially, they can both coexist.