The rapid rise of cryptocurrencies could threaten the dollar's dominance in global markets, Fed economists have warned in a new research report.
Fed economists Carol Bertaut, Bastian von Beschwitz and Stephanie Curcuru write in their new paper, "the International role of the dollar," that private digital currencies such as Bitcoin and Ethernet coins, as well as government-backed digital currencies, may reduce people's dependence on the dollar.
Their argument is that consumer and investor preferences change, while new products may change the balance between expected costs and benefits.
But the paper adds: "even so, technology alone is unlikely to completely offset the long-term dominance of the dollar."
The study comes as the Fed is expected to release another much-anticipated report soon on whether the US should issue central bank digital money (CBDC).
But key Fed officials are divided. Although Federal Reserve Chairman Colin Powell has expressed some openness to the CBDC, other Fed officials, such as Vice Chairman Randal Quarles, are more skeptical.
Mr Quarles said in July that while public interest in the digital dollar had reached a "frenzied level", the dollar had been highly digitized, an arrangement that he said was "good for the country and the economy".
In addition to digital currencies, Fed economists' research highlights two other short-term challenges that could affect the international status of the dollar.
One of them is the continued integration of Europe, a large economy with sound institutions and free trade. These economists specifically mentioned that the European Union decided to issue jointly guaranteed bonds at the height of the epidemic.
If progress is made in Europe's fiscal integration and a large and liquid EU bond market is formed, the euro may become more attractive as a reserve currency. "this integration is likely to accelerate by strengthening the infrastructure of the EU sovereign debt market and introducing the digital euro."
Still, Fed economists believe the dollar will remain attractive. "without any large-scale political or economic change that undermines the value of the dollar as a store of value or medium of exchange," they wrote. The dollar is likely to remain the world's major international currency for the foreseeable future. "