How state-backed digital currencies may reshape, but not replace, USD hegemony.
By Iñaki Aldasoro | Economist, Bank for International Settlements
Central Bank Digital Currencies (CBDCs) have emerged as a major policy experiment across the world. Over 100 countries are researching or piloting CBDCs, and some — including China with its e-CNY — have already rolled out limited versions. For the U.S. dollar, the rise of CBDCs raises a critical question: do they threaten its global dominance, or do they merely reinforce its role as the benchmark currency in a digital age?
The Global Push for CBDCs
The motivations for CBDCs vary:
- China’s e-CNY aims to increase domestic efficiency while offering an alternative to the dollar-dominated payment system.
- Europe’s digital euro project seeks to provide a sovereign alternative to private stablecoins.
- Emerging markets such as Nigeria and the Bahamas are focused on improving financial inclusion and reducing reliance on cash.
Yet in almost all cases, CBDCs are designed with interoperability in mind — and many are experimenting with cross-border settlement systems that bypass traditional dollar-based rails.
MoM and YoY Data: Digital Uptake
- Adoption: The e-CNY saw over ¥1.8 trillion (~$250 billion) in transaction volume by late 2023, a 70% YoY increase.
- Pilots: The European Central Bank expanded its digital euro trial to over 100,000 citizens in 2024, up 40% YoY.
- Cross-Border Flows: MoM BIS surveys suggest that pilot projects for wholesale CBDCs processed over $12 billion in test transactions by Q3 2024.
External Factors Shaping the Debate
- Geopolitics: Sanctions on Russia and Iran have fueled interest in non-dollar settlement options, with CBDCs pitched as tools to reduce reliance on SWIFT.
- Crime: Authorities argue CBDCs could reduce illicit finance by offering traceability. Yet privacy concerns remain, with critics warning that surveillance risks may hinder adoption.
- Climate: Policymakers note that CBDCs running on energy-efficient architectures may provide a “greener” alternative to proof-of-work crypto assets, aligning with ESG priorities.
Implications for the Dollar
The U.S. has yet to commit to a retail CBDC, though the Fed is actively researching one. In the absence of a digital dollar, rivals may gain ground in cross-border transactions. However, the dollar’s liquidity advantage and its entrenched role in global trade make outright displacement unlikely in the near term.
Instead, CBDCs may reinforce the greenback by:
- Digitizing FX markets and deepening dollar liquidity in wholesale settlement.
- Expanding global access to dollar-linked systems if the U.S. partners in multilateral CBDC frameworks.
- Competing only at the margins, especially in sanctioned or politically motivated blocs.
Lessons for Traders
For forex markets, CBDCs are not an immediate threat but a slow-moving structural factor. Traders should track:
- MoM adoption rates of pilot projects.
- YoY transaction growth in e-CNY and digital euro.
- Cross-border trials that could reduce reliance on dollar liquidity.
The big picture: CBDCs may eventually reshape how dollars are used, but for now, they highlight the enduring dominance of the greenback as the baseline currency against which all digital alternatives are measured.
