President Biden called last week for an urgent, government-wide focus from the U.S. into the research of a potential Central Bank Digital Currency (CBDC) in an executive order. It’s a move that’s been a long time coming—American efforts in the space have lagged far behind some other countries, including China, which has already launched a pilot for its own digital yuan.
Discussion on what shape that research may take – and whether it’s beneficial for the U.S. to seriously take a look at investing in a digital dollar – was the subject of last week’s meeting of the Chicago Payments Forum. Such a move could be considered in the subject of national interest, as it’s a way to combat what many in government see as the central issue with cryptocurrencies – a lack of control.
“If there’s trillions of dollars tied up in some currency that the Federal Reserve can’t control in any way, they can’t raise an interest rate, they can’t pull money out of the market,” said Peter Tapling, Managing Director of PTap Advisory, LLC and board member with the US Faster Payments Council. “They can’t print more; their ability to ensure financial stability is hard.
And it’s not just an issue for the US and the Federal Reserve; it’s a global issue, because cryptocurrency fundamentally knows no borders.
“That’s kind of the trigger point, because central banks think, oh boy, if this value is going to be changed via some digital currency, we really want that value to be something that that we can control,” Tapling said.
As a topic, however, there’s still a lot of work to be done – while strides have been made in recent months by the government on the subject of digital currencies, it’s almost exclusively been regulatory talk. That’s important, but doesn’t answer some of the fundamentals – like what, once and for all, digital currency is in the first place. Is it a commodity? A security? Something else?
And that’s before even starting to think about all the other fundamental questions raised by the prospect of a digital shift for the dollar – and they’re important ones.
“We have authority policy issues as to whether or not a central bank digital currency would issue would give interest,” Tapling said. “And I think that’s ridiculous; you don’t give interest. The central bank doesn’t give interest on the US dollar, the dollar bills sitting in my pocket gained no interest. And so that’s the kind of issue, you know? Stablecoins issue interest, and stablecoins look like money market funds.”
While research remains very much preliminary, it’s not uncharted territory – the Federal Reserve Bank of Boston, in conjunction with the MIT Digital Currency Institute released a technology paper just last month discussing their research findings on the topic. Their findings suggest that the interest is there, and the benefits could be big:
“A CBDC can provide functionality that is not currently possible with either cash or bank accounts. For example, a CBDC could support cryptographic proofs of payment, more complex transfers to or from multiple sources of funds, and flexible forms of authorization to spend, such as varying transaction limits.”
Beyond these fundamentals, though, a lot of work will still have to be done before anything like this could become more than theoretical talk for government working groups. The Federal Reserve has no structure under its current mandate to issue a digital currency that can be held by individual consumers – changing that would almost certainly require an act of Congress.
“It’s impossible for the technology people to start building anything until the policy people decide what should be built,” Tapling said. “So it’s good that they’re building pilots, and you know they actually took the code that they built and they have an open Github, anybody could download it and try it out.”
The post Could a Central Bank Digital Currency be in the Cards for the U.S.? first appeared on FinTech Rising.
