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24 April 2022
Technology continues to transform the ways of the way we live, work, spend and save, central banks across the globe are making efforts to rethink their currency to be more digital in their approach. The United States is now the latest nation to declare its "urgency" to create a digital version of its dollar, via the Central Bank Digital Currency (or CBDC).
In a factsheet, President Joe Biden's executive orders regarding digital assets, issued on Wednesday declares that "placing an urgent emphasis on research and the development of a possible United States CBDC should issuance be considered to be in the national interest."
China, second largest economy by gross domestic products, launched its digital currency softly in January. Over 100 million people have already made use of the CBDC. Kristalina Georgieva, International Monetary Fund managing Director, has stated that over 100 countries are currently exploring CBDCs in some way. She gave a speech in the Atlantic Council think-tank last month.
Georgieva stated, "We are now beyond the discussion of CBDCs as a concept and are now in the phase of experimentation." "Central banks are learning about the particulars of digital money and are developing new ideas."
David Yermack, the finance department head at New York University's Stern School of Business, said to CNN Business that it is currently "inevitable that the whole world will be issuing money in this way." The United States pandemic has driven the need for cashless payment techniques. Main Street investors are now embracing cryptocurrencies like bitcoins and ethereum. This has put an on the government officials to stay ahead of the curve.
Here's what you should be aware of when considering a CBDC.
What is a Central Bank Digital Currency and how does it function?
CBDCs are described by the Federal Reserve as "a digital currency that is freely available to the general public". The main difference between current forms of digital cash in an account at a bank or in a payment application is that the cash is a liability to the Fed and not commercial banks, hence the term "central bank currency." It would be an electronic US dollar, and is not an investment in cryptocurrency or an investment in a PayPal holding.
Although there are many opinions about how and what this might look like the idea is that it would make it less necessary for third-party processors to transfer money.
"At a very high scale the concept of a CBDC is essentially digital currency that would be created by the central bank," Sarah Hammer, the director of the Stevens Center for Innovation in Finance at the Wharton School of the University of Pennsylvania she told CNN Business. It will be calculated based on the fiat currency in the country. It would be dependent on the cash supply. When it's put into place, it will be done through approved private sector entities or a central database.
Yermack, a man who has long studied the rise and development of digital currencies has stated that CBDC CBDC could function similar to Bitcoin or other cryptocurrency.
"You would have a network wallet, probably owned by members, and where users can pay each other directly without having to go through an intermediary," Yermack stated.
Hammer believes that the biggest technological decision that policymakers must make will be whether or not the US central bank's digital currency runs on a Blockchain, which is the technology that underpins Bitcoin. It will put the government's weight behind the emerging tech.
Hammer said, "It can either be managed by central databases or through distributed ledger tech, the blockchain."
Last month the Federal Reserve Bank of Boston was joined by the Massachusetts Institute of Technology to conduct joint research on the CBDC project known as "Project Hamilton." Blockchain technology was employed to create a code base capable of processing 1.7 million transactions per second, as per an announcement prepared by the Boston Fed. It was a lot higher than the threshold of 100,000 transactions per second the researchers initially sought to achieve. The statement further stated that Project Hamilton "focuses on technological experiments and doesn't aim to build a functional CBDC to be used in the United States."
Yermack, however, said it's "likely that what they're working on is going to be what the Fed decides to grab onto and then tries to expand."
The digital Yuan in China doesn't, however, operate on blockchain tech. The digital currency is designed to substitute cash and can be accessed by a government-backed mobile app as well as Tencent's WeChat. https://cryptoblogstar.com/how-to-store-my-cryptocurrency-basic-guide-about-crypto-wallets/ makes use of the technology infrastructure, which is utilized by approuvé Chinese commercial and online banks and payment platforms, and is issued by the People's Bank of China.
What are the potential risks and potential benefits?
A CBDC can provide consumers with a cheaper, simpler and more secure option to other alternatives. It may also reduce the requirement for cash and take action against fraudulent transactions according to Hammer as well as make it more efficient for the collection of taxes and dispersing the funds of government agencies that are targeted.
She said that "there are certain financial inclusion benefits of having a central banking digital currency," she said, pointing out that they are able to connect Americans who do not have bank accounts.
The Internet—From ARPANET To Decentralized Network said that there are numerous dangers, such as security concerns and technical barriers, not to mention privacy risks. Its potential to take on some of the work performed by credit and commercial banks has led to some being concerned.
The Fed gave a particular warning regarding cybersecurity threats in its January Report. The report stated that "Any CBDC infrastructure would have to be extremely resilient against these threats. Owners of CBDC infrastructure would also need be vigilant, as criminals employ increasingly sophisticated methods and tactics."
Moreover, a CBDC could compromise the independence of the Fed and create a myriad of policy issues.
"The possibility of political abuse is huge," Yermack said. "If you gave the central bank the power to make such decisions the safeguards that the government provides for the Federal Reserve would likely need to be stronger than they are now."
Yermack acknowledges that a CBDC needs a "thoughtful political plan" and a "transition period" that allows nations to explore it in the coming decade. But he believes there are "many positive reasons" for doing this.
"Throw into the mix that people really dislike cashand the desires of the public are pushing governments in this direction as well," Yermack said.