Central bank digital currencies (CBDC) have been the talk of the town for the past couple of months and for good reason. China’s plans for a digital yuan coupled with Facebook’s digital currency Libra project ignited the global push for central banks around the world to start investigating the creation and implementation of a CBDC.
One country, however, has felt the heat more than others: The US. In March, the United States Congress proposed a digital dollar as part of the trillion-dollar stimulus package designed to help Americans stay financially afloat during the coronavirus-induced national shutdown.
The US Senate had passed a bill on 25 March to dispatch cash relief payments, and in an earlier version of the bill, a Fed-issued digital dollar and wallet were included. Despite policymakers having discussed the possibility of the Fed using blockchain technology to distribute the monetary relief, unfortunately, the digital alternatives were axed from the end product.
For Americans without bank accounts (roughly 25% of US households are either unbanked or underbanked), receiving the bill by mail would inevitably result in delays and a host of other likely complications–and it did.
What’s a CBDC?
Put simply, CBDCs are a digital form of government-backed and issued currency. Cryptocurrencies differ in that they are virtual currencies not issued by a state or government, and therefore are not financially backed by them. A CBDC system would typically be implemented through a centralised database that’s managed by a government or central bank.
It’s likely they will use blockchain technology, in the same way that traditional cryptocurrencies such as Bitcoin do. However, unlike cryptocurrencies, which are decentralised, monetary control would remain within the government.
Where does the US stand today?
Fed president, Jerome Powell confirmed in February 2020 that they’re “working hard on it [CBDC]” but recent reports claim the US is lagging behind. Sharon Bowen, former head of the Commodity Futures Trading Commission (CFTC) who currently sits on the board of directors for New York Stock Exchange-owner Intercontinental Exchange, warned: “We're falling a little bit behind when you look at what other countries have done.”
Sheila Warren, head of Blockchain at the World Economic Forum echoed her warning: “The U.S. is late to the game.”
Following an announcement in January that six central banks – in the eurozone, Japan, the UK, Canada, Sweden and Switzerland – would be working together to examine the case for issuing digital currencies, with a final report expected sometime in Q3 of this year.
Elsewhere, France’s central bank revealed this week it’s planning to carry out a series of experiments, including using a digital currency to improve cross-border payments, an analysis of how a central bank currency should be made available, and exploring “new methods of exchanging financial instruments (excluding crypto-assets) for central bank money.”
Norway is reportedly also looking at whether it may become necessary to issue a CBDC. Richard Paulsen, chief executive of Norway-based cryptocurrency investment firm Arcane Crypto told Forbes: “There is a growing sense that it is a race among central banks in the far east and European Union to introduce a central bank digital currency to unseat U.S. dollars as the only settlement currency for international businesses.”
The race is on
Arguably the biggest threat to the US Dollar’s reserve currency status comes from China. Following announcements of the nation’s CBDC pilot programme’s launch in four provinces, as well as a promised pilot during the Beijing Olympics has certainly ruffled US lawmakers’ feathers. Rumours of the DC/EP (digital currency electronic payment) being included in popular apps like WeChat and AliPay have elevated concern of the widespread adoption of a digital yuan in emerging markets and international trade.
Stateside, Senator Tom Cotton recently told a Senate Banking Committee hearing “the US needs a digital dollar”. And just recently, the Committee met to discuss “how the US can remain competitive with China”. According to CoinDesk much of the hearing was focused on America’s economic relationship with China and their respective relationships with the rest of the world:
“Crypto was brought up as one of many possible tools to maintain US economic supremacy. This could be interpreted as crypto’s increasing acceptance as a mainstream idea.”
Former Commodity Futures Trading Chairman and creator of the Digital Dollar project. Christopher Giancarlo called for the US to begin pilot programmes to test different aspects of a tokenised dollar.
Walter Russell Mead, the James Clarke Chace Professor of Foreign Affairs and Humanities at Bard College and a member of the Hudson Institute shared his sentiment, stating: “We have to assume that as the nature of finance changes, the nature of currencies change, we have to stay at the leading edge of that … innovation, so we do need to be thinking actively about how the dollar can be a fundamental building block for economic activity in this time of the information revolution.”
Physical cash is no longer viable in the world we’re living in today–but the real question is, who will maintain economic power?