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Technology continues to transform how people are living, working and spending their time, central banks around the globe have kicked off initiatives to reinvent their currencies to fit into the digital era. The United States is the latest to signal “urgency” in researching the possibility of a digital version of its dollar via the concept of a Central Bank Digital Currency, or CBDC.

The executive order issued by the president Joe Biden regarding digital assets was released on Wednesday. It includes “placing an urgent deadline for the research, development, and issuance of a potential United States CBDC,” according to an information sheet.
China, the world’s second-largest economy according to gross domestic product, soft-launched its digital renminbi in January and the CBDC has already surpassed a hundred million users. Kristalina Georgieva, International Monetary Fund managing Director, stated that around 100 countries are currently exploring CBDCs at some level. She spoke in the Atlantic Council think-tank last month.
Georgieva said, “We are now beyond the initial discussions on CBDCs and are in the process of experimenting.” “Central banks are getting used to with digital currencies and are trying out different ways of using it.”
CNN Business was informed by David Yermack (the finance chair at the New York University Stern School of Business) that it is now “inevitable that the entire world will accept money in this manner.” The United States’ pandemic caused an increase in demand for cashless payment alternatives. Main Street investors began to adopt cryptocurrencies such as bitcoin, putting pressure upon the government to stay ahead.
Here’s the information you should know about the potential CBDC.
What is a Central Bank Digital Currency? And how does it function?
CBDCs are a form of digital representation of money from central banks that is easily available to anyone, according to the Federal Reserve. The Fed would have to hold the money. It wouldn’t be available to commercial banks. This would mean that it’s a real US dollar in digital form and not an investment or a part of your PayPal.
There are of opinions about how this might function and what it could appear like, but in the end, it could alleviate the need for third-party processors to process money.
CNN Business interviewed Sarah Hammer from the Stevens Center for Innovation in Finance of the University of Pennsylvania. She said that the CBDC was simply digital money. It would be determined by the fiat currency that is in use by the country, and therefore be based on its money supply. After that it will be made available through an approved database from the government or private sector organizations that work together with the government.
Yermack who is a long-term study of the growth in digital currencies, claimed that CBDC CBDC could “actually operate an awful much like Bitcoin and other cryptocurrencies.”
“You’d likely have a network or wallets that people could pay each other directly and without the necessity of an intermediary,” Yermack claimed.
Hammer stated that policymakers must to determine if a US central banking digital currency could be run on blockchain. This is the technology behind cryptocurrency like Bitcoin and would confer federal government weight behind this new technology.
Hammer stated that the system could be managed using central databases 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 the CBDC trial called “Project Hamilton.” Blockchain technology was utilized to build a code base capable of processing 1.7 millions of transactions per second, as per the statement prepared by the Boston Fed. It was a lot more than the 100,000 transactions per second the project was originally envisioned for. Project Hamilton was described as a technology-based experiment which does not aim to establish a viable CBDC for the United States.
Yermack said that it was “likely” that the Fed will grab the projects they are working on and try to increase the size.
However China’s digital currency, the yuan (or digital currency) does not use blockchain technology. It is designed to replace cash-based payments. Access to the digital Yuan can be obtained through a government-backed smartphone app and Tencent’s WeChat. It utilizes the same tech infrastructure as the approved Chinese offline and online banks and payment services and is issued to 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 says it could be used to cut down on the demand for cash and combat fraudulent transactions.
She stated that “there are certain financial inclusion benefits of having a central bank digital currency,” noting their capacity to be accessible to Americans who do not have bank accounts.
There are a variety of risks to be aware of that could be posed, such as tech barriers and security concerns as security threats and privacy issues, Yermack noted. There are some concerns regarding its ability to do the same work as commercial banks.
In the January report, the Fed warned of cybersecurity threats. “Any CBDC infrastructure that is specifically designed for this purpose must be highly resilient to such attacks. Owners of CBDC infrastructure must remain vigilant as bad actors use more sophisticated techniques and methods.”
Additionally the possibility of a CBDC could undermine the independence of the Fed and could lead to a new set of policy issues.
Yermack stated that the possibility of misuse by politicians is very the highest. “If you give central banks this kind of power, it’ll be necessary to put in much greater political safeguards than those currently in place for Federal Reserve.”
While Yermack says a CBDC will likely require some “thoughtful revisions to the political system” and a transition time as countries experiment with CBDC over the coming 10 years He still sees “many good reasons to do this.”
Yermack said, “Throw into the fact that people don’t prefer using cash. The preferences of public have pushed government in this direction too.”