As the US government begins setting up the regulatory guardrails for a digital dollar, the EU forms a consortium, including Amazon and large EU banks, to develop a prototype for a digital euro.
It is a rare experience to find oneself in more or less full agreement with a senior central banker, particularly these days. Yet that is what happened to me just over a month ago. In early August, Neel Kashkari, ex Goldman, ex Pimco employee, currently the President of the Minneapolis Fed, lambasted the idea of creating a digital dollar, arguing that US consumers already had access to instant digital payments through private-sector platforms.* Speaking at the 2022 Journal of Financial Regulation conference at Columbia University, he also flagged concerns about the threat central bank digital currencies (CBDCs) could pose to privacy, anonymity and other basic freedoms.
“I can see why China would do it,” Kashkari said. “If they want to monitor every one of your transactions, you could do that with a central bank digital currency. You can’t do that with Venmo. If you want to impose negative interest rates, you could do that with a central bank digital currency. You can’t do that with Venmo. And if you want to directly tax customer accounts, you could do that with a central bank digital currency. You can’t do that with Venmo. I get why China would be interested. Why would the American people be for that?”
Kaskari is right, of course: they probably wouldn’t. But they’re not being consulted on the matter. In fact, in most cases they’re not even aware it is happening.
White House Recommends Creating a Digital Dollar
Today, the digital dollar is closer to becoming a reality than ever before. On Friday (Sept. 16), the Biden Administration released a framework for the responsible development of digital assets, including cryptocurrency, CBDCs and other items of value that exist only in digital form. An alphabet soup of government agencies, including the US Treasury, the Justice Department, the Consumer Finance Protection Bureau and the Securities and Exchange Commission, have been tasked with contributing to reports that will explore the risks, development possibilities and usage of digital assets.
All of this was put into motion just over six months ago by Joe Biden’s Executive Order 14067, officially dubbed “Ensuring Responsible Development of Digital Assets.” Signed on March 9, it represented the first ever “whole of government approach” to regulating digital assets. Among the executive order’s many goals is to make the handling of digital assets easier and more secure; to safeguard US global leadership in digital asset innovation; and, as laid out in section 4, to lay the groundwork for the creation of a digital dollar:
Sovereign money is at the core of a well-functioning financial system, macroeconomic stabilization policies, and economic growth. My Administration places the highest urgency on research and development efforts into the potential design and deployment options of a United States CBDC. These efforts should include assessments of possible benefits and risks for consumers, investors, and businesses; financial stability and systemic risk; payment systems; national security; the ability to exercise human rights; financial inclusion and equity; and the actions required to launch a United States CBDC if doing so is deemed to be in the national interest.
On Friday, US Treasury Secretary Janet Yellen posited two reasons for developing a digital dollar: first, because “some aspects of the current payment system are too slow and too expensive”; and second, “to reinforce the US’ role as a leader in the world financial system”.
This is seen as increasingly necessary as China forges ahead with its digital yuan. China’s central bank has been exploring the possibilities offered by digital currencies since 2014. The digital currency is now being piloted in more than 20 regions and cities and was also widely showcased in this year’s Beijing Winter Olympics. As British technology news website The Register reported last week, the Chinese government is now looking to integrate the digital yuan with China’s private digital payment systems — most notably Alibaba’s AliPay and Tencent’s WeChat Pay, which dominate China’s payments landscape and which already have millions of payment terminals outside China.
Simpler, Cheaper, More Direct
In theory, CBDCs will allow for the creation of a simpler, cheaper, more direct payment system, by cutting out most, if not all, financial intermediaries, as the Washington-based analyst NS Lyons notes in his brilliant article, Just Say No to CBDCs:
A customer would open an account directly with a country’s central bank, and the central bank would issue (create) digital money in the account. Crucially, this makes the money a direct liability of the Fed, rather than of a private bank. Using a simple smartphone app or other tools, the customer can then initiate direct transactions between Fed accounts. The digital money is deleted in one account and recreated in another instantaneously.
However, in its Future of Money and Payments report, the US Treasury envisages a two-tiered model under which the Fed would issue and redeem digital dollars but the distribution of those digital dollars would be handled by intermediaries eligible for an account at the Federal Reserve. Payment services would also be managed by banks and other private sector players:
This would be similar to how paper currency is distributed through commercial banks. It also shares similarities to responsibilities surrounding noncash retail payments today: the intermediaries onboard, provide customer support, and manage payments. In addition, intermediaries would likely implement AML/CFT obligations, while relevant supervisors would monitor compliance with those obligations.
In other words, a select group of banks and non-banks would continue to play a role in the new financial system, while most financial institutions — including the small local lenders and credit unions that serve local communities — will presumably get disintermediated. As the European Central Bank recently warned, a broadly adopted CBDC is likely to lead many people and businesses to pull their money out of commercial banks at the first, slightest whiff of a financial crisis and put it into the supposedly safer accounts held with the central bank…
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