The US dollar can become digital. Here’s what you need to know

CNN Business
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As technology continues to revolutionize the way people live, work and spend, central banks around the world have embarked on efforts to reinvent their local currencies for the digital age. Now, the US is the latest in a sign of “urgency” in the search for a possible digital version of the dollar via a central bank digital currency, or CBDC.

Part of President Joe Biden Wednesday Executive Order on Digital Assets It includes “putting urgency into research and development of a potential US Commercial Bank digital currency, should issuance be deemed in the national interest,” according to its accompanying notes. statement of facts Released by the White House.

China, the world’s second largest economy by GDP, launched the digital renminbi in January, and the CBDC already boasts more than a hundred million users. About 100 countries are exploring digital currencies for central banks at one level or another, Kristalina Georgieva, managing director of the International Monetary Fund, said during remarks at the Atlantic Council think tank last month.

“We have moved beyond the conceptual discussions of the core digital currencies of central banks, and are now in the beta stage,” Georgieva said. “Central banks are rolling up their sleeves and figuring out the bits and pieces of digital money.”

“It is inevitable that the entire world will issue money this way,” David Yermak, chair of finance at New York University’s Stern School of Business, told CNN Business. In the United States, the pandemic has driven demand for cashless payment methods and many Main Street investors have embraced cryptocurrencies such as Bitcoin and Ethereum, increasing pressure on the government not to lag behind the trend.

With the Biden administration now throwing new weight behind Americans’ money innovation, here’s what to know about potential central bank currencies.

The Federal Reserve defines central bank currencies as “a digital form of central bank money that is widely available to the general public.” One of the main differences from current forms of digital cash in a bank account or payment application is that the money will be the responsibility of the Federal Reserve, not the commercial banks – hence the “central bank money”. This means that it will be actual US dollars in digital form, not an investment in cryptocurrency or a contract in your PayPal.

There are mixed opinions on how this would work and what it would look like, but in theory it could mitigate the need for third-party processors when transferring money.

Sarah Hammer, managing director of the Stevens Center for Innovation in Finance at the Wharton School of the University of Pennsylvania, told CNN Business. “It will be based on that country’s fiat currency, so it will depend on the money supply — and then it will be implemented using a government database or approved private sector entities that work with the government.”

Yermack, who has been studying the rise of digital currencies for years, added that CBDCs “actually will work a lot like Bitcoin or other cryptocurrencies.”

“You will have a network of wallets, probably owned by members of the public, where people can pay each other directly without going through a third party,” Yermak said.

According to Hammer, an important technical decision for policymakers is whether the US central bank’s digital currency runs on the blockchain, the technology that underpins cryptocurrencies like Bitcoin, because it will throw the weight of the federal government behind this emerging technology.

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

The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology published a joint paper last month on the CBDC experiment that they called “Project Hamilton.” The work used blockchain technology and “produced a single token base capable of handling 1.7 million transactions per second,” per statment From the Federal Reserve Bank of Boston. This was well above the researchers’ benchmark of 100,000 transactions per second At first he sought it. The statement added that the Hamilton project “focuses on technological experimentation and does not aim to create a usable CBD in the United States.”

However, Yermak said that “it’s possible that all they’re working on is what the Fed is catching and trying to scale.”

However, the Chinese digital yuan is not particularly working on blockchain technology. The digital yuan is intended to replace cash payments and can be accessed through a government-backed mobile app as well as Tencent’s WeChat. It uses the existing technical infrastructure used by authorized Chinese commercial banks and online payment platforms, and is issued by the People’s Bank of China.

CBDCs can offer consumers a more convenient, secure, and cheaper alternative to the options currently available. It could also ease the need for cash and suppress fraudulent transactions, according to Hammer, as well as make it more efficient at collecting taxes or dispersing targeted government funds.

“There are some financial inclusion advantages to owning a central bank digital currency,” she added, noting its ability to reach unbanked Americans.

Yermack noted that there are many potential risks, including technical barriers and security concerns as well as privacy threats. Its ability to do some of the work that commercial banks and credit markets do has also worried some.

The Fed specifically warned of potential cybersecurity risks in January Transfersaid, “Any CBDC infrastructure needs to be highly resilient in the face of such threats, and CBDC infrastructure operators will need to be vigilant as bad actors use ever more sophisticated tactics and tactics.”

Moreover, a central bank digital currency could threaten the independence of the Fed and raise a plethora of new policy questions.

“The risk of political abuse is high,” Yarmak said. “If you give the central bank that kind of power, the policy guarantees will probably need to be much higher than what is currently in place for the Federal Reserve.”

While Yermack says the CBDC will likely call for some “thoughtful political redesign” and a period of transition as countries experiment with it over the next decade, he still sees “many good reasons to do so”.

“Consider the fact that people don’t really like to use cash – the preferences of the public are pushing governments in that direction as well,” Yermak said.