Is the US Developing Its Own Central Bank Digital Currency?
In January, the US Federal Reserve published a paper on central bank digital currencies which explores whether the US might use its own cryptocurrency as a central bank digital currency (CBDC). The Fed posed 22 questions in the discussion paper as part of an information-gathering effort on central bank digital currencies (CBDCs), and it will accept public comments through May 20, 2022. So, will the US develop its own cryptocurrency? What impact will it have if it is successfully brought to market?
What is CBDC?
A CBDC is a virtual fiat currency that runs on a private blockchain overseen by the government, complementing the official printed and minted currency of the issuing country. CBDCs are usually regulated and issued by the country’s central bank or monetary regulator. CBDC is officially issued and supported by the full trust and credibility of its issuing government.
The Fed’s take on the value of a CDBC
It is well known that the members of the Fed are political appointments, not people legally elected by American voters, being nominated by the US President and confirmed by the Senate. Adopting a central bank digital currency will allow them to enhance their influence even further. Furthermore, certain lawmakers in the US hold broad views on cryptocurrencies and CBDCs. Many financial institutions and experts fear that the Fed’s intention to introduce its own digital currency based on the US dollar is politically risky.
Some lawmakers regard blockchain-based cryptocurrencies as a technological advance that might ensure US long-term supremacy in the global economy, while advancing economic equality for the world’s 1.7 billion unbanked people. Other lawmakers disagree, seeing cryptocurrency as the latest opportunity for terrorists and hackers to create havoc by stealing illegal cash from the public. Both political perspectives make sense to some extent.
This is also the underlying basis for the Fed’s skepticism of CBDCs. A day after the Fed issued its discussion paper, the White House said that it will issue an executive order authorizing all federal agencies to analyze the challenges and possibilities that cryptocurrencies offer to national security, as well as how to address them.
Regardless of whether the Fed agrees with the White House’s planned executive order, BigONE feels that its CBDC plan’s neutrality is politically smart. The Fed went out of its way in its discussion paper to emphasize that it has no official position on the impending issuing of a CBDC and will only take additional efforts to produce a CBDC if there is broad public and cross-government support.
Will the US have its own CBDC?
All the political commotion and outrage surrounding the digital dollar begs the question of whether the US will issue its own CBDC; nonetheless, BigONE believes that the answer is yes; the US Government, the world’s largest economy, will not give up the most significant monetary invention in many years. The real question, however, is not whether the US will establish its own CBDC, but when? Based on the Fed’s actions and statements, whether it’s out of political survival or genuine concern for ordinary people, it’s taking this very seriously and appears to want to build a real CBDC system.
For the time being, caution appears to be the best way to approach CBDC, rather than rushing to implement measures to deal with it; with the advantage of doing so through consultation is that most people can agree on CBDC. “While the Federal Reserve has made no decisions on whether to pursue or implement a central bank digital currency, or CBDC, we have been exploring the potential benefits and risks of CBDCs from a variety of angles, including through technological research and experimentation. Our key focus is on whether and how a CBDC could improve on an already safe and efficient U.S. domestic payments system,” is the Fed’s current ‘holding position’. In the discussion paper it added that it will only develop a CBDC if research points to “benefits for households, businesses, and the economy overall that exceed the downside risks”, and indicates that CBDC is superior to alternative methods.
If the US launches a CBDC, what will be the impact?
BigONE believes that the launch of a CBDC in the US will have an influence on the stability of the global macro economy. The introduction of CBDC means that it is extensively utilized as a new method of retail payment denominated in US dollars, with national support and reliability, of which these five elements have the most significance:
• The launch of a CBDC will significantly increase society’s overall confidence in money and payment functions
• It can effectively solve the liquidity problem of banks
• It can further optimize the financial credit system
• A CBDC will not have a long-term impact on existing money market functions, the two will complement each other
• If a CBDC can provide the same interest as current bank deposits, it will help the implementation and transmission of monetary policy
Furthermore, a CBDC has the potential to simplify cross-border payments using new technologies, the introduction of simplified distribution channels, and the creation of new opportunities for cross-jurisdictional collaboration and interoperability. However, realizing these potential improvements would necessitate extensive international cooperation to address common standards and infrastructure issues, the types of intermediaries who would have access to any new infrastructure, legal frameworks, preventing illicit transactions, and the cost and timing of implementation.
The US has yet to announce plans to actually create or launch a CBDC in the foreseeable future. However, other government officials contend that the US must welcome innovation to keep its position as the world’s dominant currency. And, to keep the dollar as the world’s reserve currency in the digital era, the US needs to develop a mindset that favors innovation over competition with the private sector. Simply said, to maintain its current position, the US must prioritize blockchain technology with American foundations. As a result, BigONE believes that the creation of a CBDC in the US is only a matter of time, especially if the CBDC developed by China is rolled out internationally in the near future.
