Is the United States Making a CBDC?

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Contributor, Benzinga
July 11, 2022

The short answer is yes, the U.S. is already developing and testing a ​Central Bank Digital Currency (CBDC) digital dollar. Nothing is final yet, however. The Federal Reserve recently released a report titled "Money and Payments: The U.S. Dollar in the Age of Digital Transformation". This article describes in depth what the future of a central-bank-issued digital U.S. dollar might look like. 

CBDCs are becoming increasingly mainstream with the launch of China's own CBDC and many other global superpowers following suit.

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What is a CBDC?

A CBDC is a digital version of a central bank-issued currency. Any number of different kinds of digital currencies could fall under this definition, as long as it is backed by a central government. A CBDC, just like cash, is legal tender, which means it is legally valid and must be accepted to pay for goods, services and any other financial obligation. 

CBDCs are believed to exist side by side with cash currency as another way for businesses and households to promptly make payments.

Many CBDCs might leverage blockchain or distributed ledger technology (DLT) to make records of these day-to-day transactions. Deloitte.com outlines the key aspects of what a CBDC is and what it is not.

Central bank digital currency is:

  • The same as cash or bank notes but in a digital form.
  • Issued by a country or jurisdiction's central bank.
  • Influenced in the same way central banks tweak monetary supply with monetary policies. 
  • Based on a digital ledger for accounting that uses a form of blockchain or DLT.
  • Subject to that specific CBDC’s central bank’s decisions.

Central bank digital currency is not:

  • Decentralized in any way because the validators” are run by a centralized government.
  • Governed by communities voting via proposals based on their holdings or stake in the system. 
  • determined by the markets because a CBDC’s value remains at a fixed price. 

On a side note, CBDCs built on general purpose blockchains (similar to Ethereum) will also have the ability to use smart contracts that provide custom parameters for users to interact with each other in a digital economy. Smart contracts can also be used to provide an economy with stimulus if certain events occur such as a natural disaster or another pandemic.

Why is the United States Interested in a CBDC?

The unprecedented interest of nations worldwide in developing a CBDC has left the U.S. slightly behind. Fed Chair Jerome Powell has become increasingly more anxious about a U.S. CBDC because of how much farther along other countries are compared to ours.

In a statement, Powell said, "A U.S. CBDC could potentially help maintain the dollar's international standing." The remarks were made at a conference held by the Federal Reserve Bank about the roles of the dollar globally.

At CoinDesk’s Consensus 2021, Federal Reserve Governor Lael Brainard also commented that the dollar can not fall behind in the development of a native U.S. CBDC.

Ten countries have already launched CBDCs, and another 15 countries — including China, Russia and South Africa — are currently in the pilot stage of their CBDCs.

How Will a United States CBDC Affect Me?

CBDCs are still a relatively new subject, and they will have different effects depending on the country or jurisdiction. If a U.S. CBDC is implemented soon, then it would ideally adhere to existing due processes for authorities to obtain an individual's financial records. A U.S. Digital Dollar will most likely be far different than China's Digital Yuan, which is used for its social credit system and infringes upon western ideas.

How to Prepare for a Future U.S. CBDC

If a U.S. CBDC is implemented soon, then it could either violate freedoms by an invasion of privacy or prove to be a useful tool if proper oversight is met by the U.S. Congress. 

The CBDC can be seen as a double-edged sword as it allows for immense innovation in the digital sector of the U.S. economy by revolutionizing cross border payments and opening the doors to programmable money but could also infringe on basic privacy for its users.

What Will Happen to the U.S Dollar with a CBDC?

It is speculated, but not certain, that the U.S. CBDC will exist parallel to the Federal Reserve Notes. Federal Reserve notes are a liability of the Fed's balance sheet and are just another word for physical cash. 

There is no indication that the Fed intends to "phase out" physical cash, but many critics of CBDCs argue this is the case. They believe that it will be a new way for central banks to invade others' privacy by eliminating the current anonymity factor of cash transactions.

Only time will tell who is correct.

Is Now a Good Time to Research a U.S. CBDC?

The exact framework for what the U.S. Digital Dollar will look like in the future is still unknown. You could learn more by reading articles from private companies that have been researching and prototyping far before the Fed’s whitepaper.

The Accenture-led Digital Dollar Project is one of the leading sources on the topic. It has been actively researching and developing a U.S. CBDC since 2020. The section of its research paper "Tenets of a Digital Dollar" describes in depth the characteristics a U.S. CBDC might have.

Here is a short summary of what a final product of a U.S. Digital Dollar might contain. 

  1. Tokenized: The digital dollar will be a tokenized version of Federal Reserve notes or cash.
  2. The digital dollar will most likely operate in parallel with existing fiat payment and commercial bank money. It won’t replace the entire U.S. financial system but function as an addition to it.
  3. To maintain western values of individual privacy and personal freedoms, the digital dollar will follow the current due process for obtaining an individual’s financial information as is outlined in the Fourth Amendment.
  4. If a DLT/blockchain is used to create the digital dollar, then it will need to be a future-proof model that can withstand the passage of time and can adapt to new use cases or increasing demand. In other words, the U.S. government would need to use or create a blockchain network that can handle high throughput.

While it is unclear whether these features will be in the final model of the Federal Reserve's CBDC, these principles help provide a foundation for what we should expect.

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