As technology continues revolutionizing the lives and work of individuals, central banks around world are working to create digital currencies. The United States is now the latest nation to declare its “urgency” for a digital version of its dollar via the Central Bank Digital Currency (or CBDC).
According to the fact sheet provided by the White House, part of President Joe Biden’s executive order regarding digital assets, which was issued on Wednesday is “placing the highest priority on research and the development of a possible United States CBDC. If it is determined that the issue is in national interest,”
China which is the second-largest country in terms of gross domestic product soft-launched its digital currency in the month of January. The CBDC has more than 100 million customers. In all, more than 100 countries are exploring CBDCs on one level or at another, International Monetary Fund managing director Kristalina Georgieva said during remarks at the Atlantic Council think tank last month.
“We have moved beyond discussion of CBDCs as a concept and are in the process of testing,” Georgieva said. “Central bankers are learning about digital money bits and pieces, and getting their hands dirty,” Georgieva said.
CNN Business spoke with David Yermack from New York University’s Stern School of Business as the chair of the finance department. He claimed that it was now “inevitable” that the entire world would issue currency in this manner. The pandemic that struck the United States prompted demand for cashless payment methods. A lot of Main Street investors have adopted cryptocurrencies such as bitcoin and ethereum. This has increased pressure on the federal authorities to stay on top of the demand.
The Biden administration is now placing more emphasis on innovation using American money. Here’s the information about the possibility of a CBDC.
What exactly is the Central Bank Digital Currency? How would it work?
CBDCs are a form of digital representation of money from central banks that is readily accessible to the general public, as per the Federal Reserve. A key difference from traditional forms of digital cash in an account at a bank or in a payment app is that the cash would be a liability to the Fed and not commercial banks, thus the “central bank currency.” This means that it would not be an investment in cryptocurrency or an account in your PayPal, but an actual US Dollar in digital form.
There are many views on how and what this would be, but it can at least reduce the necessity of third-party processors when it involves the transfer of money.
CNN Business spoke with Sarah Hammer who is the Director of Operations of the Stevens Center for Innovation in Finance (Wharton School at the University of Pennsylvania). It will be determined by the fiat currency that country has, and would be based on the money supply. Following this, it would be made available through an approved database from the government or private sector companies that are working with the government.
Yermack has researched the growth of digital currencies over the last years, and has concluded that CBDC could “actually function an awful lot like Bitcoins and other cryptocurrencies.”
“You’d have the system of wallets probably owned by members of public, where people can pay one another directly without needing to make use of a third-party service,” Yermack stated.
A significant tech decision for policymakers, according Hammer the author, is whether a US central bank’s digital currency operates on a blockchain, the technology underpinning cryptocurrencies like Bitcoin, as it would give the federal government a foothold in this new technology.
Hammer explained that the system can be managed using central databases or distributed ledger technology, such as blockchain.
The Federal Reserve Bank of Boston, Massachusetts Institute of Technology and the Massachusetts Institute of Technology published joint research in June on a CBDC trial called “Project Hamilton.” According to the statement from the Boston Fed, the blockchain technology was utilized and produced the “one code base that could handle 1.7million transactions per second” result. It was a lot higher than the goal of 100,000 transactions per second the researchers initially set out to achieve. Project Hamilton was described as a technological experimentation that doesn’t aim to create a useful CBDC for the United States.
Yermack stated that it’s possible that the material they’re working on could end up being the Fed’s grab to scale-up.
The digital Yuan in China doesn’t run on blockchain tech. The digital currency is created to replace cash-based payments. http://cqms.skku.edu/b/lecture/1425114 is accessible through a government-backed app as well as Tencent’s WeChat. It makes use of the technology infrastructure that is used by approuvé Chinese commercial and online banks as well as payment platforms. It’s issued by the People’s Bank of China.
What are the possible advantages and risk?
A CBDC could potentially offer consumers an easier, more secure and more affordable alternative to alternatives available today. Hammer believes it will decrease the need to cash and crackdown against fraud. Additionally, it will help in collecting taxes and dispersing the government’s funds.
“There are some benefits to financial integration central bank digital currencies,” she stated, in announcing their ability to reach Americans who don’t own bank accounts.
Yermack pointed out that there are numerous potential dangers to this, such as issues with security and technology and privacy issues. There are some who worry about the possibility for it to do certain of the work currently done by commercial banks or credit markets.
The Fed made a specific warning about cybersecurity risks in its January Report. They stated “Any CBDC infrastructure would have to be extremely secure against these threats. Operators of CBDC infrastructure also need be on guard as criminals employ increasingly sophisticated techniques and strategies.”
A CBDC could also affect the independence and bring up many new questions regarding policy.
Yermack said there is a risk of political abuse. “If you gave the central bank this kind of power, the political safeguards are likely to have to be higher than that currently available to the Federal Reserve.”
Yermack said that a CBDC is likely to require a “thoughtful changes to the way politics are conducted” and a transitional period during which nations try it out over the course of a decade. However, he believes that there are “many compelling arguments” to do so.
Yermack stated, “Throw into the fact that the majority of people do not prefer using cash. the preferences of the public have pushed government in this direction too.”