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As technology continues its revolution in how people are able to live, work and spend money, central banks from all over the world are launching efforts to reinvent their local currencies for the digital age. Today the United States has signaled “urgency”, in seeking the creation of a digital version of its dollar via the creation of a Central Bank Digital Currency, also known as CBDC.

The executive order issued by President Joe Biden regarding digital assets was released on Wednesday. It’s a part of “placing an urgent deadline for the development, research and publication of a proposed United States CBDC,” according to a information sheet.
China, the world’s second-largest economy according to gross domestic product, soft-launched its digital currency renminbi in January. The CBDC has already surpassed a hundred million users. Kristalina Georgieva (International Monetary Fund’s managing director) stated that CBDCs had been studied in some manner by more than 100 countries in her speech to the Atlantic Council think tank last week.
Georgieva declared, “We are now beyond the discussion of CBDCs as a concept and are now in the phase of experimentation.” “Central banks are beginning to become comfortable with digital money by getting in on the game.
CNN Business’ finance chair at New York University Stern School of Business David Yermack stated that it is now “inevitable” the entire globe will accept money in the same manner. In the United States, the pandemic has prompted demand for cashless payment methods and many Main Street investors have embraced the cryptocurrencies bitcoin and ethereum. They are putting pressure on the federal government not to fall behind on the new trend.
Here’s the scoop on a potential CBDC in the context of how the Biden administration puts more weight on the idea of a new way to use Americans with money.
What exactly is ? How would it function?
CBDCs can be described by the Federal Reserve as “a digital currency that is open to the general public”. The Fed will hold the cash, and not the commercial banks as a risk. This is CBDCs differ from other cash types that are digital within a bank account. This means it will not be an investment in cryptocurrency, or an account in your PayPal, but an actual US Dollar that is digital.
There are a variety of opinions about how this could appear like, but it may at least reduce the necessity of third-party processors when comes to transferring money.
CNN Business interviewed Sarah Hammer from the Stevens Center for Innovation in Finance at the University of Pennsylvania. She explained that a CBDC was simply digital money. “It would use the fiat currency from the country, so it will be based on the current money supply — then it would go into effect using either a government-approved database or private sector companies that are that have been approved by the government.
Yermack is a researcher who has attentively following the development of digital currencies over the last years. He said that CBDC CBDC “would be able to function quite a bit similar to Bitcoin or any other cryptocurrency.”
“You’d have a system of wallets, most likely owned by members of the public, where people could pay one another directly, without having to go through a third party,” Yermack said.
Hammer says that a key tech decision for policymakers is whether the US central bank operates the blockchain-based digital currency technology. This will allow it to throw federal government support for emerging technology.
Hammer said that the system could be managed through either a central database or distributed ledger technology, such as the blockchain.
The Federal Reserve Bank of Boston, Massachusetts Institute of Technology and the Massachusetts Institute of Technology published jointly-authored research in June regarding a CBDC trial known as “Project Hamilton.” According to the statement from the Boston Fed, the work was based on blockchain technology and resulted in an algorithm capable of handling 1.7 million transactions in a second. It was significantly more than the 100,000 transactions per seconds that the Boston Fed was initially hoped to get. Project Hamilton was described as a research project which does not aim to develop a practical CBDC for the United States.
Yermack, however, said it’s “likely that what they’re working on will end up being what the Fed grabs onto and tries to increase its size.”
China’s digital yuan is, however, isn’t based with blockchain technology. is to substitute cash and can be accessed by a government-backed mobile application as well Tencent’s WeChat. The People’s Bank of China issued it. It utilizes existing tech infrastructure that is used by Chinese online and commercial banks and payment platforms.
What are the potential benefits and potential risks?
A CBDC could provide customers with a cheaper, simpler, and safer alternative to other alternatives. Hammer believes it can reduce the need for cash, and also help in the fight against fraudulent transactions. In addition, it can make it more efficient in tax collection and distribution of the government’s funds.
“There are a few advantages to financial inclusion that come with having a central bank’s digital currency,” she said, in announcing their ability to be accessible to Americans who don’t have bank accounts.
There are several potential risks that could be posed, such as tech barriers and security issues as security threats and privacy issues, Yermack noted. There are concerns about its potential to perform the same function as credit markets and commercial banks.
The Fed cautioned specifically about potential cybersecurity risks in its January report, saying “Any dedicated infrastructure for a CBDC must be extremely resistant to such threats, and the operators of the CBDC infrastructure would need to be vigilant as hackers utilize ever more sophisticated methods and tactics.”
A CBDC could be a threat to the independence of the organization or create new questions about policy.
Yermack said that “the danger of political exploitation was high.” “If you give central banks this kind of power, the security measures are likely to have to be higher than that currently available to the Federal Reserve.”
Yermack declared that the creation of a CBDC will likely require some “thoughtful political reform” and a transitional time while nations experiment with it over the course of a decade. However, he still believes that there are “many compelling arguments” to consider it.
Yermack stated, “Throw into the fact that the majority of people do not prefer using cash. The preferences of public are pushing government in this direction too.”