Though the cryptocurrency market is currently in the red, the concept of a cashless society enabled by digital currency has true staying power and exciting implications. Governments around the world are in various stages of studying and implementing central bank digital currencies (CBDC).
What is a central bank digital currency (CBDC)?
A central bank digital currency (CBDC) is similar to cryptocurrency, but it represents a country’s government-issued currency in digital form. Cryptocurrencies are decentralized—they are not regulated by a central authority. In contrast, as the name suggests, CBDCs are issued and regulated by the nation’s central bank, just like the U.S. dollar is regulated by the Federal Reserve. If implemented at scale, CBDCs would be available to the general public—in essence, a digital dollar.
CBDCs provide businesses and consumers with a stable way to transact using digital currency without the risk of high volatility that cryptocurrencies have. People and businesses can use CBDC to perform financial transactions, such as paying bills and purchasing goods and services. Similarly, government agencies can issue benefit payments or collect taxes from citizens using CBDC.
A particular benefit of CBDCs is speed. U.S. Treasury Secretary Janet Yellen told CNBC last year that a CBDC could result in “faster, safer, and cheaper payments.” This is because CBDCs can speed up the time it takes for payments to clear and would reduce transaction costs. A CBDC might also promote economic inclusion among the unbanked and underbanked.
It also should be mentioned that a U.S. CBDC would remove some of the need for cryptocurrencies, a positive for the federal government, as cryptocurrency can be used to facilitate fraud, fund illegal activities, and commit financial crimes. Indeed, Federal Reserve Chair Jerome Powell has said that reducing the use case for crypto is “one of the stronger arguments in [a U.S. CBDC’s] favor.”
Where have CBDCs been launched?
Currently, 105 countries are either considering or actively developing CBDCs, according to the Atlantic Council; this total includes 10 countries who have already launched a CBDC. The U.S. is well behind all of these nations, but the current administration has taken significant steps to change this.
In March 2022, President Joe Biden issued an executive order that detailed his administration’s key priorities regarding the benefits and risks of digital assets, including a potential U.S. CBDC. In response, several government agencies have worked for the past six months to develop a comprehensive framework and guidelines for the responsible development and implementation of a U.S. CBDC. These agencies have submitted nine reports to the White House.
Based on their work, the Biden administration released the document “Policy Objectives for a U.S. Central Bank Digital Currency System” [PDF] reflecting the federal government’s priorities for a U.S. CBDC as well as the conditions that will inform its development. Besides protecting and supporting businesses, consumers, and investors, any CBDC must be functional, flexible, efficient, and secure. It must also promote economic growth, be interoperable with other platforms, and protect national security.
Below are some of the other highlights from the agencies’ reports submitted to the White House this September.
Promoting financial stability by tightening supervision and regulation
Introducing a CBDC could potentially alter the structure of the US financial system, changing the responsibilities of the central bank and the private sector to their stakeholders. While banks could use a widely accessible CBDC to fund loans instead of deposits, doing so and in excess could disproportionately decrease the available deposits in the banking system. Banks could also increase bank funding expenses and the cost at which they offer credit to consumers and businesses.
To mitigate the financial stability risks of digital assets, the reports emphasize the role of the Treasury in identifying regulatory gaps and vulnerabilities. The reports also highlight the importance of interagency collaboration and the use of data and tools to develop strategies to foster financial stability.
Advancing United States leadership in the global financial system and economic competitiveness
Other nation’s central banks have piloted programs and research studies to address the viability and efficacy of CBDC in their respective economies. The E.U. plans to launch a digital euro, potentially as soon as 2025. Nigeria, Africa’s largest economy, has already launched their CBDC. India is targeting the end of 2023 to roll out its digital rupee. Meanwhile, China has already launched a pilot program of the digital yuan; in late September, it announced it would expand the program to four more provinces, including Guangdong and Sichuan, counted among the four most populous.
The reports emphasize that one of the main goals of a CBDC should be to support the U.S.’ leadership in the global economy. Analysts at the Atlantic Council point out that, with 100-plus countries now considering a CBDC, the U.S. is feeling more urgency in developing its own, since those countries will want to ensure interoperability with the dollar, the world’s currency reserve. Washington’s leadership on CBDC development is also needed, given the fact that the international financial transfer system is dollar-based.
Promoting financial inclusion by increasing access to safe digital assets
Increasing access to cost-effective payment methods and facilitating rapid transactions reduce some of the economic barriers households and communities face. A CBDC can streamline cross-border payments, simplify distribution channels, and enhance international coordination, which result in financial inclusion and equity. A U.S. CBDC might also help the unbanked and underbanked population participate more fully in the economy. Our economy is increasingly cashless, yet there’s still a subset of the population that relies entirely on cash.
What’s next? Going forward, the Treasury will head up an interagency working group that includes the Federal Reserve, National Economic Council, National Security Council, and Office of Science and Technology Policy to further advance the development of a CBDC. It seems clear that the U.S. is still several years behind the rest of the world, but all the pieces are slowly coming into place.