Central banks all over the globe have begun to work to digitally reinvent local currencies, as technology continues to change the lives of people. The United States is the latest to signal “urgency” to investigate the possibility of a digital version of its dollar via the concept of a Central Bank Digital Currency, or CBDC.
According to the fact sheet provided by the White House, part of President Joe Biden’s executive directive on digital assets, which was issued on Wednesday is “placing priority on research and developing a potential United States CBDC. If the issuance is considered to be in the national interest,”
China which is the world’s second-largest economy in terms of GDP, soft-launched in January its digital currency, the renminbi. Since then, over 100,000,000 users have registered for the CBDC. Kristalina Georgieva (International Monetary Fund’s managing director) claimed that CBDCs have been considered in some way by more than 100 countries in her speech to the Atlantic Council think tank last week.
Georgieva said, “We are now beyond the initial discussions on CBDCs and are in the process of experimenting.” “Central bankers are learning about digital money bits and pieces, and rolling up their sleeves,” Georgieva said.
David Yermack, the finance department head at New York University’s Stern School of Business, stated to CNN Business that it is now “inevitable that all over the world will issue money this way.” The swine flu epidemic in the United States prompted demand for payments that do not require cash. Many Main Street investors have adopted cryptocurrencies such as bitcoin and ethereum. This has put pressure on the government to keep up with the rapid growth.
Here’s the details on a potential CBDC in the context of how the Biden administration is putting more emphasis behind innovation of Americans with money.
What is the Central Bank Digital Currency and how does it work?
CBDCs are a form of digital representation of the central bank’s money that is readily available to anyone, according to the Federal Reserve. The main difference between traditional forms of digital cash in a bank account or payment app is that the money is a liability of the Fed and not commercial banks — thus the “central bank currency.” This means that it’s a real US dollar, but in digital format, not an investment or a part of your PayPal.
Though opinions vary about the way it will work and what it could look to, theoretically it could eliminate the need for third-party processors whenever money is transferred.
CNN Business spoke with Sarah Hammer director of the Stevens Center for Innovation in Finance (Wharton School at the University of Pennsylvania). “It will be built on the fiat currency of the country which means it will be built on the current money supply — and then it would be implemented with an approved database of the government or private sector companies working with the government.”
Yermack, a man who has been studying the rise and development of digital currencies said that CBDC CBDC could function similar to Bitcoin or other cryptocurrencies.
“You’d be able to establish a network of wallets, probably held by the general public, in which people can pay each other directly without having to go through an intermediary,” Yermack said.
One of the most crucial tech decisions for policymakers, according Hammer, is whether or not a US central bank digital currency runs on a blockchain, the technology that underpins cryptocurrencies such as Bitcoin and Ethereum, since it could give the federal government a foothold in the new technology.
“It is possible to operate it through a central database, or through distributed ledger technology, the blockchain,” Hammer said.
ADA coin of Boston published last month joint research on “Project Hamilton”, a CBDC experiment. According to a statement issued by the Boston Fed, the work was based on blockchain technology and resulted in an algorithm that could process 1.7 million transactions per second. This was far above the threshold of 100,000 transactions per second the researchers originally set out to achieve. Project Hamilton “focuses only on technological experimentation” and doesn’t intend to develop a usable CBDC in the United States.
Yermack, however, said it’s “likely that what they’re working on will be the thing that the Fed grabs onto and tries to increase its size.”
The digital Yuan of China does not, however, operate on blockchain tech. what is cardano is created to replace cash payments. It is accessible through a government-backed application and Tencent’s WeChat. The People’s Bank of China issued the currency. It is based on the existing technology infrastructure used by Chinese online and commercial banks, as well as payment platforms.
What are the benefits and the potential risks?
A CBDC could provide consumers with the convenience of a safer, easier and less expensive alternative to the alternatives available today. It may also reduce the requirement for cash and take action against fraudulent transactions According to Hammer and increase efficiency in tax collection or distribution of targeted government funds.
“There are some benefits for having a central bank’s digital currency,” she explained, pointing out that they are able to connect Americans who do not have bank accounts.
There are a variety of risks to be aware of that could be posed, such as tech barriers and security concerns as in addition to privacy risks, Yermack noted. Some have also expressed concern regarding the possibility of taking on work previously done by commercial banks or credit markets.
The Fed gave a particular warning about cybersecurity risks in its January Report. They stated “Any CBDC infrastructure would have to be extremely robust against threats like this. Operators of CBDC infrastructure also need to remain vigilant since criminals are deploying increasingly sophisticated techniques and methods.”
In addition, a CBDC could undermine the independence of Fed and lead to a new set of questions regarding policy.
Yermack stated that there is a possibility of abuse by politicians. “If you give the central banking this level of power, the current Federal Reserve’s safeguards for politics would have to be significantly higher.”
While Yermack states that the CBDC will likely require some “thoughtful political redesign” and a transition period as nations experiment with CBDC over the coming 10 years He still sees “many good reasons to do this.”
“Throw into the mix that people really do not like cashpreference of the general public push governments in this direction as well,” Yermack said.