Technology continues to transform how people live, work and spend their money central banks across the globe have kicked off efforts to re-invent their local currencies for the digital age. Now, the United States has signaled “urgency” to find an electronic version of its dollar via the creation of a Central Bank Digital Currency, also known as CBDC.
As part of President Joe Biden’s executive order on digital assets, Wednesday mentions “placing urgency upon research and development a potential United States CBDC. Should it be determined that issuance is in the national interests,” according an factsheet released by the White House.
China is the world’s second-largest economy by gross domestic product, soft-launched its digital renminbi in January and the CBDC has already surpassed 100 million users. Kristalina Georgieva from the International Monetary Fund said last month that CBDCs are being investigated by about 100 countries.
Georgieva declared that “we have moved beyond conceptual discussions of CBDCs and we are now entering the stage of testing.” “Central banks are learning the specifics of digital currency and are also developing their own ideas.”
David Yermack, the finance department chair at the New York University’s Stern School of Business, told CNN Business that it is currently “inevitable that all over the world will soon be able to issue money this way.” The United States’ pandemic caused an increase in demand for cashless payment options. Main Street investors began to accept cryptocurrencies, such as bitcoin, putting pressure upon the government to not fall behind.
With the Biden administration now putting new importance to developing new ways to use Americans the money they earn, here’s what to know about CBDC.
What exactly is a Central Bank Digital Currency and how would it function?
CBDCs are a digital version of money from central banks that is easily accessible to the general public, as per the Federal Reserve. One of the main differences from the current digital cash options in a bank account or payment app is that the money would be a liability to the Fed and not commercial banks — thus the “central bank money.” It would be a digital US dollar, not an investment in crypto, or an investment in a PayPal holding.
While there are numerous opinions on how and how this would look, it could theoretically decrease the need for third-party processors to transfer money.
CNN Business’ Sarah Hammer who is the director of the Stevens Center for Innovation in Finance at the University of Pennsylvania said that CBDC CBDC will be digital money issued by the central banks. It will be determined by the fiat currency the country has, and would be based on the money supply. After this the CBDC would be implemented with a database that is approved by the government or private sector entities which are working in conjunction with the government.
how many crypto users in the world who is a long-term study of the growth in digital currencies, claimed that a CBDC would “actually operate an awful lot like Bitcoin and other cryptocurrencies.”
“You’d have a system of wallets, likely owned by members public, that could pay each others directly without needing to use a third party,” Yermack stated.
Hammer states that a crucial technology decision for policy makers is whether the US central bank has an electronic currency based on blockchain technology. This would allow it to put federal government weight behind emerging tech.
“It can be controlled by a central database or through distributed ledger technology, which is the blockchain” Hammer said.
The Federal Reserve Bank of Boston, Massachusetts Institute of Technology and the Massachusetts Institute of Technology published joint research in June about the CBDC trial dubbed “Project Hamilton.” The work used blockchain technology and “produced one code base that is capable of processing 1.7 million transactions per second,” per a statement from the Boston Fed. This was far more than the 100,000 transactions per minute that originally wanted to achieve. Project Hamilton is focused on technological experiments and do not intend to create the first CBDC that can be used within the United States.
Yermack said that it was “likely” that the Fed will grab onto the projects they are doing and then try to expand.
The digital Yuan in China doesn’t, however, operate on blockchain tech. The digital currency is designed to replace cash and is accessible via a mobile application as well Tencent’s WeChat. The currency is issued by China’s People’s Bank of China and makes use of the existing technology infrastructure of Chinese commercial and online banks.
What are the potential advantages and risks?
A CBDC could potentially offer consumers a more convenient, safer and cheaper alternative to the alternatives currently available. Hammer asserts that the CBDC may help to reduce cash shortages and crackdown on fraud. It also makes it simpler to collect taxes and disperse government funds.
She added that there are benefits to financial inclusion of having a centralized digital currency bank. This is due to the fact that they can be able to reach Americans who do not have bank accounts.
There are many potential risks, including tech barriers and security issues as security threats and privacy issues, Yermack noted. Its potential to take on some of the work performed by commercial banks and credit markets has also caused some to worry.
The Fed issued a specific caution regarding cybersecurity threats in their January Report. They said “Any CBDC infrastructure would have to be extremely secure against such threats. The operators of CBDC infrastructure will also have be on guard because criminals have become more sophisticated in their techniques and methods.”
A CBDC could also affect the independence of the body and trigger many new policy questions.
Yermack stated that the possibility of political manipulation is the highest. “If the Federal Reserve were to have this power it would mean that the Federal Reserve would need more security measures than those currently in place.”
Yermack declares that a CBDC will likely require a “thoughtful, political redesign” and a transition period as countries experiment with it over ten years. He does however see “many reasons to consider this.”
Yermack said that cash is not something people like to use. The desires of the people push the government in this direction, too.