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The Race To Build Central Bank Digital Currencies

Digital Dollar Stablecoin
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EDITOR NOTE: The race for efficiency and “financial inclusion” through creating a Fed-controlled digital dollar is a race to suppress, minimize, or even abolish the banking system. A disruption of the banking system, however problematic it may be, is the beginning of the end of financial privacy, data security, and, in a leap not so remote, free-market capitalism itself. Many citizens across the globe see central bank digital currencies (CBDCs) as an evolutionary step in the issuance of money. It brings speed, efficiency, and can be held by anyone without even having a bank account. It might even allow nations to provide a Universal Basic Income directly into your virtual wallet. However, by accepting these benefits and taking part in this system, you will invariably hand the government full control over your financial prospects. The Fed may be looking to bolster cybersecurity measures to prevent “bad actors” from accessing your digital money. But what if the Fed and the government themselves are the nefarious actors not to be trusted? What if their agenda exceeds the petty aim of stealing money, opting instead to fully surveil and control what you own, how you purchase or sell it, how you spend--in short how you live?

Trends for increased presence of cryptocurrencies and diminishing role of cash in the global economy have accelerated during the coronavirus crisis, increasing pressure for global central banks to develop their own digital technology and currencies.

The Economist summarises; “the general direction is clear. As cash disappears, official digital currencies will emerge, and the links between people and central banks are likely to become stronger.

The digital dollar issue is another shift from the previous Administration and an indicator of growing global interest in the area.

There will, however, need to be clarity on the reason for issuing the digital currencies and there are important concerns over potential damage to the existing financial system.

What is a digital dollar?

A digital dollar would involve citizens holding an account which would be used as a payment channel. It would operate outside the traditional commercial banking system and administered by the central bank.

According to the Economist; “Central bank digital currencies (CBDC) are simply a digital version of cash-the physical money issued by central banks. In most countries, their design will probably resemble existing online payment platforms, with one key difference: money held on a CBDC app or website will be equivalent to a deposit at the central bank.

Reuters adds; Like banknotes or coins, they would give holders a direct claim on the central bank, leapfrogging commercial banks. Backed by central banks, they would be as “risk-free” as traditional money, and let holders make online payments.

This is not equivalent to cryptocurrencies which are held outside the official system. The blockchain technology could be used, although there would be alternative technology bases.

US Treasury and Fed show greater interest

The coronavirus pandemic has accelerated the use of cashless payments and further eroded the use of cash in all major economies.

This switch has also increased the focus on potential financial stability risks through private payment systems.

Treasury Secretary Yellen, who also served as Federal Reserve Chair, stated in a conference last month that it made sense for central banks to look at issuing sovereign digital currencies.

This is a significant shift from previous Treasury Secretary Mnuchin.

Fed Chair Powell also shifted his position, calling the digital dollar; “a high priority project for us.” He added, “We are committed to solving the technology problems, and consulting very broadly with the public and very transparently with all interested constituencies whether we should do this.”

Digital dollar seen as a tool to boost inclusion

Yellen added; “Too many Americans don’t have access to easy payments systems and banking accounts, and I think this is something that a digital dollar, a central bank digital currency, could help with. It could result in faster, safer and cheaper payments, which I think are important goals.”

Barry Eichengreen, Professor of Economics at the University of California, Berkeley; “Americans without credit cards and bank accounts, who rely entirely on cash, are denied not just financial services but other services as well.”

This problem has been illustrated by the Fed difficulties in paying individual stimulus cheques to the unbanked.

Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center, noted Yellen’s support; “I read it as an endorsement for Treasury to be involved in the exploration of central bank digital currencies, and we hadn’t seen that before.”

Senate Banking Committee Chair Sherrod Brown has also advocated using digital technology to help reduce costs for accessing and transferring money, especially those outside the traditional banking system.

Commercial banking structure needs to be protected

Yellen also noted that officials must first address a number of issues -- including how a digital currency might affect traditional bank deposits, financial stability, consumer protection and illicit transactions.

“There’s a lot to consider here, but it’s absolutely worth looking at,”

Eichengreen noted; “If people shift their savings from banks to digital wallets, banks’ ability to lend will be hamstrung. Some banks will close, and small businesses that rely on banks for credit will have to look elsewhere.

There have been proposals that there would be a cap on individual digital holdings to lessen the risks.

The latest BIS survey showed over a quarter of central banks do not currently have the authority to issue a CBDC and around 60% see themselves as unlikely to issue any type of digital currency in the short or medium-term.

The survey also noted, however, “central banks are moving into more advanced stages of CBDC engagement, progressing from conceptual research to practical experimentation.”

Security and liberty concerns flagged up

Eichengreen also notes potential security concerns; “a Fed-run network of retail payments would be a rich target for hackers and digital terrorists. Security and financial stability are of the essence, and it is not obvious that they can be guaranteed.

Other commentators have also noted the risk of an erosion of civil liberties through increased tracking and the visibility of digital transfers as opposed to cash.

There will also be concerns that the move to digital currencies will force citizens away from cash which could actually increase exclusion.

There will also be reservations that the creation of digital dollars would have political implications and make it easier to engage in direct quantitative easing.

China leading the global race, does the US need to compete?

China is pushing ahead with introduction of a digital yuan with trials already underway and is, for example, aiming to make it a centre-piece of the 2022 Winter Olympics.

Frederick Kempe, President & CEO of the Atlantic Council, considers that competing with China should be the top priority for developing a digital currency.

According to Kempe; “China has ramped up efforts for a digital yuan to undermine the dollar and extend its influence. The benefits for Beijing would be considerable if the U.S. cedes ground in financial technological innovation and the dollar’s global dominance wanes.”

Kempe added; The U.S. can still win this contest if it not only quickly develops a digital dollar, but collaborates on the creation of a digital euro, a digital pound, and a digital yen. The total firepower of these currencies would close the innovation gap quickly. It would also demonstrate the value of working with allies, a centerpiece of Biden foreign policy.”

Other analysts have expressed fears that the dollar’s position as the dominant international currency will be eroded by the ease of using China’s digital unit in cross-border transactions, and the US will squander a singular source of monetary and financial leverage.

Eichengreen rejects these arguments and considers that the Chinese motivation is to maintain control of the domestic financial system rather than an international tool. “The PBOC’s main motivation for issuing a digital renminbi is to create a government-controlled alternative to two very large and loosely regulated digital payment platforms, Alipay and WeChat Pay.”

Nevertheless, if China and Europe push ahead with digital currencies, the US will find it hard to resist.

Eichengreen summarises; “All this is to say that while the case for a digital dollar may be worthy of examination by Yellen and Powell, it is hardly a slam-dunk.

Originally posted on Exchange Rates

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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