US Dollar Could Go Digital; understand what it means

With technology revolutionizing the way people live, work and spend, central banks around the world have begun efforts to reinvent their local currencies for the era. digital.

You U.S recently signaled the “urgency” in the search for a possible digital version of their dollar through a Central Bank Digital Currency, or Central Bank Digital Currency (CBDC).

Part of the Presidential Decree on the President’s Digital Assets Joe Biden signed on Wednesday (9) includes “putting urgency on research and development of a potential United States CBDC, should the issuance be considered in the national interest”, according to a fact sheet released by the White House.

THE Chinathe world’s second largest economy by GDP, launched its digital renminbi in January. The Chinese CBDC already has more than one hundred million users.

In all, about 100 countries are exploring CBDCs at one level or another, said the director general of the International Monetary Fund (IMF), Kristalina Georgievaduring comments made at the Atlantic Council think tank meeting last month.

“We have moved beyond the conceptual discussions of CBDCs and are now in the experimentation phase,” Georgieva declared. “Central banks are rolling up their sleeves and getting familiar with the bits and bytes of digital money.”

David Yermack, chair of the finance department at New York University’s Stern School of Business, told CNN Business that it is now “inevitable that the whole world is issuing money in this way”.

In the United States, the pandemic has spurred demand for cashless payment methods and many off-exchange investors have embraced it. cryptocurrencies like the bitcoin and ethereum, putting pressure on the government not to lag behind the trend.

With the Biden administration now giving new weight to coin innovation, here’s what you need to understand about a potential CBDC.

What is a CBDC?

O Federal Reserve defines CBDCs as “a digital form of central bank money widely available to the general public”.

A key difference from current forms of digital money in a bank account or payment app is that the money would be a liability of the Fed rather than commercial banks – hence “central bank money”. This means that it would be an actual US dollar in digital form, not an investment in a cryptocurrency or a fund in the PayPal.

There are differing opinions on how this would work in practice, but in theory it would be possible to alleviate the need for third-party processors when transferring money.

“At a very high level, a CBDC is just digital money that would be issued by the central bank,” said Sarah Hammer, managing director of the Stevens Center for Innovation in Finance at the Wharton School at the University of Pennsylvania.

“It would be based on the fiat currency of that country, so it would be based on the money supply – and then implemented using a government database or approved private sector entities working with the government.”

Yermack, who has studied the rise of digital currencies for years, added that a CBDC “would actually operate a lot like bitcoin or other cryptocurrencies.”

“It would be a network of wallets, probably held by individuals, where they could pay each other directly without going through third parties,” Yermack said.

According to expert Hammer, a significant technology decision for policymakers is whether a US central bank digital currency runs on a blockchainthe technology that underpins cryptocurrencies like bitcoin, as this would put the weight of the federal government behind this emerging technology.

“It can be operated through a central database or through distributed ledger technology, the blockchain,” said Hammer.

The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology (MIT) published joint research last month on a CBDC experiment. The study was dubbed “Project Hamilton”.

The work used blockchain technology and “produced a codebase capable of handling 1.7 million transactions per second,” according to a statement from the Boston Fed.

This was far above the 100,000 transactions per second benchmark that the researchers initially sought to achieve.

The statement added that Project Hamilton “focuses on technological experimentation and is not intended to create a usable CBDC for the United States.”

However, New York University’s Yermack said it’s “likely whatever they’re working on is whatever the Fed is going to grab and try to implement.”

China’s digital yuan, however, does not operate on blockchain technology. It aims to replace cash payments and can be accessed through a government-maintained mobile app as well as Tencent’s WeChat app.

It uses existing technology infrastructure used by approved Chinese commercial and online banks and payment platforms, and is issued by the People’s Bank of China (BPOC).

What are the potential benefits and risks?

A CBDC could offer consumers a more convenient, safer and cheaper alternative to the options available today.

It could also alleviate the need for cash and clamp down on fraudulent transactions, according to Hammer, as well as being more efficient in collecting taxes or distribute targeted government funds.

“There are some financial inclusion benefits to having a central bank digital currency,” added the Wharton School expert, alluding to the ability to benefit Americans who don’t have bank accounts.

There are several potential risks, including technology barriers and security concerns, as well as privacy threats, Yermack noted.

The potential to take over some of the work done by commercial banks and credit markets has also caused concern.

The Fed specifically warned of potential cybersecurity risks in a January report, saying that “any infrastructure dedicated to a CBDC would need to be extremely resilient to these threats, and operators of CBDC infrastructure would need to remain vigilant as bad actors employ methods and increasingly sophisticated tactics”.

Furthermore, a CBDC could threaten the Fed’s independence and raise a host of new policy issues.

“The risk of political abuse is enormous,” Yermack said. “If you give the central bank that kind of power, the political safeguards would likely need to be much higher than what is currently in place for the Federal Reserve.”

While Yermack says a CBDC will likely require a “careful policy redesign” and a transition period as nations experiment with it over the next decade, he still sees “many good reasons to do so.”

“Add to that the fact that people really don’t like using money, meaning public preferences are also pushing governments in that direction,” Yermack said.