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Technology continues to make waves in the way people do business, live and spend, central banks across the globe are launching efforts to reinvent their local currencies for the modern age. United States is one of the first nations to signal “urgency” by requesting a digital currency from its Central Bank. The Central Bank Digital Currency (or CBDC) will enable the US to seek the digital equivalent of the dollar.

The President’s executive order regarding digital assets on Wednesday includes “placing the highest priority on the development and research of a potential United States CBDC, should issuance be deemed as being in the national interest” according to a fact sheet published by the White House.
China is the second largest economy according to gross domestic product, soft-launched its digital currency renminbi in January. The CBDC has already surpassed 100 million users. All told, around 100 countries are considering CBDCs at one level or another, International Monetary Fund managing director Kristalina Georgieva stated in her remarks at the Atlantic Council think tank last month.
Georgieva stated that the discussion of CBDCs is moving on to the next phase, which is “the period of testing”. “Central banks are becoming comfortable with digital currency and are trying out different ways of using it.” was informed by David Yermack (the finance chair at New York University Stern School of Business) that it’s “inevitable that all of the world will be able to issue money in this manner.” The United States’ pandemic caused a demand for cashless payment alternatives. Main Street investors began to adopt cryptocurrencies such as bitcoin, which is putting pressure on the government to stay ahead.
Here’s the scoop about a possible CBDC as the Biden administration is putting more emphasis in the direction of innovation with Americans with money.
What is the Central Bank Digital Currency and how would it work?
CBDCs are defined by the Federal Reserve as “a digital currency that is open to the public”. The Fed will hold the cash in place, not commercial banks as a liability. This is why the CBDCs are different from other cash types that are digital in a bank account. This means that it would not be an investment in cryptocurrency, or an account with PayPal however, it would be an actual US Dollar that is digital.
While there are many different opinions about how this would work and look, in theory it could make it less necessary to use third-party processors to process money transfers.
“At an extremely high level the concept of CBDC can be described as CBDC is simply digital money that is issued by the central bank,” Sarah Hammer, the managing director of the Stevens Center for Innovation in Finance at the Wharton School of the University of Pennsylvania, told CNN Business. “It is dependent on the fiat currency of that nation, so it would be based on the currency supply. Then, it would be implemented with an approved database of the government or private sector entities that are working in conjunction with the government.”
Yermack who is a long-term study of the rise in digital currencies, said that a CBDC could “actually function a lot like Bitcoin and other cryptocurrency.”
“You’d have a network most likely held by the public, where people can pay each other directly, without needing to go through a 3rd party,” Yermack explained.
One of the most crucial tech decisions for policymakers, as per Hammer the author, is whether or not a US central bank’s digital currency operates on a blockchain, which is the technology that underpins cryptocurrencies such as Bitcoin, as it would give the federal government a foothold in this new technology.
Hammer stated that the system can be managed through either a central database or distributed ledger technology such as the blockchain.
The Federal Reserve Bank of Boston released in the last month joint research about “Project Hamilton” an CBDC experiment. According to the statement that the research was founded on blockchain technology. It produced one code base that can handle 1.7 million transactions per second. It was significantly more than the 100,000 transactions per second that was initially hoped to achieve. Project Hamilton is focused on research and development in the field of technology. It is not aiming to develop the first CBDC that could be utilized within the United States.
Yermack, however, said it is “likely that whatever they’re working on will be the thing that the Fed grabs onto and tries to expand.”
The digital Yuan of China does not, however, operate with blockchain technology. It is designed to replace cash payments and is accessible via an app supported by the government along with Tencent’s WeChat. It is based on existing technology infrastructure, and is accepted by Chinese commercial and online banks, as well as payment services. It is issued and maintained by the People’s Bank of China.
What are the potential risks and benefits that could be averted?
A CBDC could provide consumers with a better, safer and less expensive alternative to current choices. Hammer says that CBDC could help reduce the problem of cash shortages and also reduce fraud. It can also make it easier to collect taxes or distribute the funds of the government.
“There are some benefits for having a central bank’s digital currency,” she explained, pointing out that they are able to be used to reach Americans who do not have bank accounts.
Yermack warned that there are possible risks, including security concerns, tech barriers privacy risks and security concerns. There have been some who have expressed concerns about the possibility of taking on work previously done by commercial credit markets or banks.
The Fed warned specifically of potential cybersecurity threats in its January report in which it stated “Any designated infrastructure for a CBDC would need to be extremely resistant to such threats. Likewise, the owners of the CBDC infrastructure must be vigilant as hackers use ever-more sophisticated strategies and techniques.”
Furthermore the possibility of a CBDC could threaten the independence of Fed and create a whole new set of policy issues.
Yermack declared that there is a risk of political abuse. “If you give the central banking this level of power, the Federal Reserve’s security measures for political repression will have to be much greater.”
Yermack states that CBDCs are not a simple thing to do. CBDC will likely require a “thoughtful, political redesign” as well as a transitional phase when countries try it over ten years. He does however see “many reasons to consider this.”
“Throw in the fact that people dislike cashpreference of the public have pushed governments in this direction , too,” Yermack said.