Brooks Kraft/ Getty Images - The Eccles Building Brooks KraftAccording to Bank of America, the adoption of digital currencies by central banks is "inevitable".The US must solve two problems, however: How to include unbanked Americans as well as how to deal with cross-border retail transfers.Analysts stated that "Central banks have both the power and will to prevent very bad outcomes."Check out more stories from Insider's business page.According to Bank of America, the adoption of digital currencies by central banks is "inevitable" because of numerous benefits. However, there are still many challenges that must be overcome before a digital dollar can be effectively launched.Ethan Harris, an economist, and Athanasios Vampvakidisthere, a currency strategist, highlight one of the many benefits of CBDCs well-designed. They allow for instantaneous transactions, at minimal cost, no matter where they are located.This was evident during the pandemic, when millions of Americans in need received stimulus payments. Transfers via check would have taken too long, while credit cards would have been much more cost-effective.According to BofA analysts, however, there are two obstacles that the US must overcome before a CBDC is successfully launched.It must first figure out how to include approximately 5% of American households without bank accounts, and roughly 21% who do not have credit cards or charge cards. These individuals may be excluded from participating once the US has its CBDC.It is important to determine if "digital pockets" can be used for expensive cross-border transfers, particularly with only 3% of Americans owning cell phones, and 15% owning smartphones.Analysts said that central banks will continue to move along two tracks: improving the existing payment system and creating new payment methods.Analysts stated that "Central banks have both the power and will to prevent very bad outcomes." They won't throw the baby with the bathwater. Instead, they will maintain control over the payments system and reduce disruptions to credit flow.Analysts also expressed concern that CBDCs for major currencies could be made available internationally and "erode the monetary sovereignty of smaller countries."They said that CBDCs, especially one that is backed by the US are in some ways superior to bank accounts as a place of value, especially during times of crisis.CBDC is a digital version of the US dollar that can be used by the public. It is a form of central bank liability. Although it will be fully supported by the central bank, it could also be managed by designated financial institutions.According to the Bank for International Settlements (BIS), 56 central banks are currently developing or considering digital currency, with China leading the charge as it slowly rolls out its eRMB.For its part, the Fed revealed in May that it had taken additional steps to explore a digital currency. This summer, the Fed will release a discussion paper outlining its thoughts on digital payments.
