Auto Draft

As technology continues to revolutionize the way that people live, work and spend their money, central banks around all over the world have launched initiatives to reinvent their currencies to fit into the digital age. The United States is now the most recent country to declare its “urgency” to have the creation of a digital version of their dollar via the Central Bank Digital Currency (or CBDC).

A portion of President Joe Biden’s executive order on digital assets that was issued on Wednesday includes “placing urgency on the development and research of a potential United States CBDC, should its issuance be considered to be in the national interest,” according to an accompanying fact sheet published by the White House.
China is the second largest country in terms of gross domestic product globally has soft-launched the digital currency renminbi last January. The CBDC boasts more than 100 millions of users. Kristalina Georgieva from the International Monetary Fund said last month that CBDCs are being investigated by about 100 countries.
Georgieva stated that discussion on CBDCs has moved on to the next stage which is “the period of testing”. “Central banks are learning the specifics of digital currency and are also developing their own ideas.”
CNN Business spoke with David Yermack from New York University’s Stern School of Business as the chair of the department of finance. He stated that it was now “inevitable” that the entire world would soon be able to issue money using this method. 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 increased pressure on the federal government to keep up with the pace.
With the Biden administration now putting more weight behind innovating Americans’ money, here’s what to know about a potential CBDC.
What is the Central Bank Digital Currency? And how does it function?
CBDCs are “a digital version of central bank money that is accessible to everyone” according to the Federal Reserve. One of the main differences to digital cash in a payment app or bank account is that the money would not be a liability for commercial banks. The “central bank money” refers to the obligation of the Fed to the money. This means that it is an actual US dollar in digital form, not the equivalent of a crypto investment or a holding in your PayPal.
There are differing opinions on the way this could work and what it would appear like, but in theory it would eliminate the requirement for third-party processors when transferring money.
“At a very high scale it is clear that a CBDC is simply digital money that would be created by the central bank” Sarah Hammer, the director of the Stevens Center for Innovation in Finance at the Wharton School of the University of Pennsylvania, told CNN Business. It would be based on the currency that is fiat in the nation. The money supply would then be used to implement the program.
Yermack is a researcher who has been keenly watching the growth of digital currencies for many years. He believes that a CBDC “would actually work quite a bit similar to Bitcoin or any other cryptocurrencies.”
“You’d have an entire system of wallets likely owned by members public, where people can pay one another directly, without the need to use a third-party,” Yermack stated.
One of the most crucial tech decisions for policymakers, as per Hammer the author, is whether a US central bank digital currency runs on a blockchain, which is the technology that underpins cryptocurrencies such as Bitcoin and Ethereum, since it could put the weight of the federal government behind this emerging tech.
Hammer said that “it is possible to operate it through a central data base or distributed ledger technology, like the blockchain.”
The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology published joint research last month on the CBDC study dubbed “Project Hamilton.” According to that was released, the work was built on blockchain technology. The result was a code base that can manage 1.7 million transactions every second. This was significantly higher than the goal of 100,000 transactions a second that was originally set to achieve. Project Hamilton is a project that is focused on the research of technological innovation, and not on creating a US-friendly CBDC.
Yermack said, however, that it is “likely that whatever they’re working with is going to be what the Fed grabs onto and tries to expand.”
China’s digital yuan is, however, does not rely with blockchain technology. The digital Yuan was created to replace cash payments. It is accessible via a government-backed smartphone application and Tencent’s WeChat. It is based on the existing technology infrastructure used by approved Chinese commercial and online banks and payment platforms. It’s issued by the People’s Bank of China.
What are the potential advantages and dangers?
A CBDC could be a cheaper easy and quicker alternative to the current choices. Hammer claimed that CBDCs could reduce the need for cash, snare on fraud and make it easier to collect taxes and disperse specific government funds.
“There are some financial integration benefits of having central bank digital currency,” she stated, in announcing their ability to reach Americans who do not have bank accounts.
Yermack said that there are a variety of risks including security concerns and technological barriers, as well as privacy risks. There are some concerns regarding its ability to do the same function as commercial banks.
In an January report, the Fed identified cybersecurity risks that could be a threat. “Any CBDC infrastructure that is dedicated to this purpose will need to be highly resistant to these attacks. Operators of CBDC infrastructure must remain alert as criminals employ increasingly sophisticated methods and techniques.”
Additionally the CBDC could threaten the independence the Fed and create new policy options.
Yermack said that “the risk of political abuse was huge.” “If the Federal Reserve were to be given this power and power, then the Federal Reserve would need more protections from the political world than is that is currently in place.” states that a CBDC would likely require some “thoughtful and political rethinking” and a transition period in which countries test it over the next ten years. He does however see “many advantages to doing this.”
“Throw in the fact that people really do not like cash- the preferences of the general public push governments to change their policies,” Yermack said.