As technology continues to revolutionize in how people are able to live, work and spend, central banks around the world are launching efforts to reinvent their local currencies for the modern age. In the present the United States has signaled “urgency” to find the creation of a digital version of its dollar through the creation of a Central Bank Digital Currency, commonly referred to as CBDC.
The President’s executive order on digital assets, issued on Wednesday includes “placing urgency on the research and development of a possible United States CBDC, should its issuance be considered to be as being in the national interest” according to a fact sheet that was released by the White House.
China, which is the second-largest economy in terms of gross domestic products, soft-launched their digital renminbi in January. The CBDC has more than 100 million users. Kristalina Georgieva, from the International Monetary Fund, managing director of the CBDC stated that more than 100 countries are now exploring CBDCs in some way. This was according to her remarks made at the last month’s Atlantic Council think tank.
Georgieva declared, “We are now beyond the initial discussions on CBDCs and are now in the phase of experimentation.” “Central banks are learning about the details of digital money and are developing new ideas.”
CNN Business interviewed David Yermack who is New York University’s finance department head. He claimed that it was “inevitable that the entire world’s nations will be releasing these currencies.” 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 in the current trend.
With the Biden administration now putting new weight behind developing new ways to use Americans with money Here’s the information you need to know about the potential CBDC.
What is the Central Bank Digital Currency? And what is its purpose?
The Federal Reserve defines CBDCs as “a digital version of central bank currency which is accessible to the general public.” One of the main differences to digital cash that is used in a payment application or bank account is that the money will not be a requirement for commercial banks. The term “central bank money” refers to the obligation of the Fed to pay the money. It would be an electronic US dollar, and is not an investment in crypto, or an investment in a PayPal holding.
There are a variety of opinions about what and how this will look but it could at least reduce the necessity of third-party processors when it comes to transferring money.
CNN Business spoke with Sarah Hammer who is the Director of Operations of the Stevens Center for Innovation in Finance (Wharton School at the University of Penn). “It would use the fiat currency from that country and basing it on the currency supply. Then, it could be put into operation with a database that is approved by the government or private sector entities authorized by the government.
Yermack has researched the growth of digital currencies in recent years and concluded that CBDC could “actually function an awful lot like Bitcoins or other cryptocurrencies.”
“You would have a wallet on the network, probably owned by the members, so that members could directly pay each other without needing to connect to an intermediary,” Yermack stated.
Hammer said that policymakers have to decide whether the US central banking digital currency could be run on a blockchain. This is the technology that powers cryptocurrency like Bitcoin and would give the federal government a role in this emerging technology.
Hammer stated that it could be operated via a central database or by distributed ledger technology like the Blockchain.
The Federal Reserve Bank of Boston released in the last month joint research about “Project Hamilton” which is a CBDC experiment. According to a statement issued by the Boston Fed, the work was based on blockchain technology and resulted in an algorithm capable of handling 1.7 million transactions per second. This was far above the benchmark of 100,000 transactions per second that the researchers originally set to reach. Project Hamilton is focused on technological experiments and does NOT aim to create an CBDC that can be used within the United States.
Yermack said, however, that it is “likely that what they’re working on is going to be what the Fed takes and attempts to scale up.”
China’s digital yuan however, is notable for the fact that it does not operate on blockchain tech. The digital yuan is designed to replace cash payments. It can be accessed via a government-backed app and Tencent’s WeChat. It utilizes existing tech infrastructure, and is accepted by Chinese commercial banks and online banks as well payment services. It is managed and issued by the People’s Bank of China.
What are the potential risks and benefits that could be averted?
A CBDC could be a less expensive easy and quicker alternative to the existing options. Hammer stated that it might reduce the requirement for cash, crack down on fraudulent transactions, and make it easier to tax collection and distribute specific government funds.
“There are where cryptocurrency is used of having a central bank’s digital currency” she said in announcing that they could be used to reach Americans who do not have bank accounts.
Yermack stated that there are a variety of potential risks, such as security and privacy risks as well as technological barriers and security issues. There have been some who have expressed concerns regarding the possibility of being able to take on tasks previously completed by commercial banks or credit markets.
In its January report, the Fed highlighted cybersecurity risks and advised that any CBDC infrastructure should be resistant to threats. The CBDC infrastructure operators must remain vigilant to bad actors using ever more sophisticated tactics.
A CBDC could also undermine the independence of the body and trigger a host of new questions regarding policy.
Yermack declared, “The risk for political misuse is huge.” “If you give the central bank this amount of power, then the current Federal Reserve’s safeguards for politics would have to be significantly greater.”
Yermack acknowledges that a CBDC is a process that requires the development of a “thoughtful political design” and the need for a “transition time” to allow nations to explore it over the next decade. But he believes there are “many good reasons” for doing this.
Yermack said, “Take into account the reality that people do not really like spending money — their desires are driving governments to the same place as the public,”