Donald Trump will block CBDC if he gets elected?

“As your president, I will never allow the creation of a central bank digital currency,” said former President Donald Trump. 

There are lots of issues for the FX market to think about, should former President Trump win a second term in November. Much of the focus in the press and in the currency markets has been on issues such as making the 2017 tax cuts permanent and introducing an across-border 10% tariff, with a special tariff of 60%, or more, for China. There’s certainly enough here to tax the market's mind ahead of the November 5^th election and thereafter, should Trump win.

What’s more, as far as we can tell, most analysts seem to think that these things could prove positive for the US dollar, in much the same way as the dollar rallied when Trump won the first time in 2016. However, we should not lose sight of the fact that there might be other factors that could undermine the US dollar. Perhaps chief amongst these are factors such as American democracy and the rule of law; the strength of which has bolstered the US dollar’s international status in the past, but could prove an Achilles heel in the future.

Another issue, which we want to focus on here, is whether a Trump win could put back, or even kill off, the introduction of a Central Bank Digital Currency (CBDC) by the Fed. For this is something that could not just undermine the US dollar but outweigh those other more headline-grabbing issues such as tariffs.

The Fed, like other central banks, is studying the issue of CBDCs. But, as far as we are aware it might be the only central bank that could see any aspirations to issue a CDBC thwarted by politicians. These politicians come from the Republican side of the House and it appears that they will have a champion in the shape of Trump should he win in November.

Mr. Trump described a CBDC as a “dangerous threat to freedom” last month and vowed to block it if he becomes president. Even if he does not win in November there is still the issue that the Republican Party could block it, depending on who emerges victorious in Congressional elections in November. Former Trump adversary for the 2016 Republican presidential nomination, Ted Cruz is among a number of Republican Senators that have introduced a bill to block the Fed from issuing a CBDC and we can expect this to be an ongoing issue after the election whether Trump wins or not. Of course, the prospect of a CBDC lies some way in the future.

Fed Chair Powell used his recent monetary policy update to reassure Congress that the bank is nowhere close to even making a recommendation yet. With this in mind, it may well be the case that, even if the Fed were to introduce a CBDC, it might not be until well after the next president has left the White House. However, we know that many other central banks and governments are far keener on the idea, with some, such as China, even undertaking low level trials of a CBDC. These central banks could leap far ahead of the Fed, especially if the Fed is blocked from introducing a CBDC. But would that undermine the US dollar?

Unsurprisingly, Fed officials appointed by Trump, such as Christopher Waller, say no. He’s right in arguing that a number of factors that give the US dollar its dominance, such as the depth and liquidity of the treasury market, won’t be undermined by the lack of a US CBDC. That’s perhaps particularly so as long as China, for instance, retains capital controls, or the euro zone persists with national bond markets and not one single market. But in other respects, the lack of a US CBDC could weigh on the dollar’s stature and perhaps its value.

The Standard Bank has argued before that the challenge for the US dollar is not so much that another currency, such as the renminbi, arrives at a position where it can challenge the US dollar in all aspects. The capital account issue we talked about before is just one hindrance. But in other areas, such as as a payment currency for trade, the US dollar could certainly suffer from the absence of a CBDC. This, of course, assumes that a CBDC would be accessible directly or indirectly by non-domestic companies. But if we assume that this accessibility would be granted by the PBOC, ECB and others who go ahead with a CBDC, then US dollar dominance in this area of payments could slip and possibly weigh on the value of the greenback over the long haul.