Central banks around the world are beginning to explore digitally redefining local currencies, as technology continues to transform the lives of individuals. The United States is now the latest nation to announce its “urgency” to have an electronic version of its dollar via the Central Bank Digital Currency (or CBDC).
According to a accompanying factsheet in the President’s executive orders on digital assets, issued on Wednesday declares that “placing an urgent emphasis on research and the development of a United States CBDC should issuance be considered in the national best interests.”
China which is the second-largest economy in terms of gross domestic product, soft-launched their digital renminbi in January. The CBDC has over 100 million users. Kristalina Georgieva of International Monetary Fund said last month that CBDCs are being investigated by about 100 countries.
Georgieva stated that “we have moved beyond conceptual talks of CBDCs, and we are now entering the stage of testing.” “Central banks are putting their hands up and gaining a better understanding of the bits and bytes of digital money.”
CNN Business spoke with David Yermack from the New York University’s Stern School of Business as the head of the department of finance. He stated that it was now “inevitable” that the entire world would issue currency this way. In the United States, the pandemic propelled demand for cashless payment methods. Many Main Street investors have embraced the cryptocurrencies bitcoin and ethereum, putting pressure on the government not to fall behind on the trend.
Here’s the scoop about a possible CBDC, as the Biden administration puts more faith behind innovation of Americans and their money.
What is a Central Bank Digital currency and how does it function?
CBDCs can be described by the Federal Reserve as “a digital currency that is freely available to the general public”. It is important to note that this cash will be a debt of the Fed, not of commercial banks. This means it will not be an investment in cryptocurrency, or an account with PayPal, but an actual US Dollar that is digital.
While there are numerous opinions about how this might look like, it could theoretically reduce the need for third-party processors to transfer funds.
CNN Business was told by Sarah Hammer, managing director of the Stevens Center for Innovation in Finance, Wharton School of the University of Pennsylvania. It would be based upon the fiat currency of the country. The cash supply would then be utilized to implement the plan.
Yermack has researched the growth of digital currencies over the last years and concluded that CBDC could “actually function an awful lot like Bitcoins and other crypto currencies.”
“You’d probably have a network or wallets that users can use to pay one another directly, and without the need for an intermediary,” Yermack claimed.
One of the most crucial tech decisions for policymakers, according to Hammer, is whether or not a US central bank’s digital currency is based on a blockchain, the technology underpinning cryptocurrencies like Bitcoin, as it would give the federal government a foothold in this emerging tech.
Hammer stated that “it could be controlled by a central database or distributed ledger technologies, 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 the CBDC trial dubbed “Project Hamilton.” According to the statement by the Boston Fed, the work involved blockchain technology and produced an algorithm that could process 1.7 million transactions in a second. It was a lot more than the 100,000 transactions per second that initially was the goal. The statement also stated that Project Hamilton “focuses on technological research and experimentation, but does not intend to create a usable CBDC to be used in the United States.”
Yermack however stated the possibility that the Fed will pick up on the current trends and try to increase the size of their operation.
China’s digital dollar, however is not compatible with blockchain technology. The digital money aims to replace cash transactions. It is accessible through a government supported mobile application or Tencent’s WeChat. The People’s Bank of China issued the currency. It utilizes existing tech infrastructure that is utilized by Chinese commercial and online banks and payment platforms.
What are the negatives and the benefits?
A CBDC could offer customers a more convenient, safer and cheaper alternative to the alternatives available today. Hammer claimed that CBDCs could reduce the requirement for cash, snare on fraud and help tax collection and distribute the funds of government agencies that are targeted.
She also said that there are benefits to financial inclusion of having a central digital currency bank. This is due to the fact that they are able to reach Americans who don’t have bank accounts.
Yermack said that there are a variety of threats, including security issues and technical barriers, not to mention privacy threats. There are some who worry about the possibility of it being able to perform certain tasks previously performed by credit or commercial banks. markets.
In an January report, the Fed identified cybersecurity risks that could be a threat. “Any CBDC infrastructure that is specifically designed to protect against cyberattacks will need to be highly resistant to such attacks. Owners of CBDC infrastructure should be vigilant as bad actors use ever-more sophisticated methods and strategies.”
Moreover an CBDC could potentially compromise the independence of the Fed and trigger a host of policy issues.
Yermack stated that “the danger of political exploitation was very high.” “If you granted the central bank this power the security measures for the Federal Reserve would likely need to be stronger than they are now.”
Yermack said that CBDC is a possibility that CBDC is likely to require a “thoughtful political reform” and a transitional period while nations experiment with it over the course of a decade. However, he believes that there are “many compelling motives” to consider it.
Yermack stated that cash is not something people like to use. The needs of the general public push governments to this end, too.