Wall Street Sees Risks in CBDC Digital Currency Idea


The world’s central banks are worried about the huge growth of uncontrolled and unsecured cryptocurrencies, so they are exploring their own alternative. While the Bahamas became the first state to issue the Central Bank Digital Currency (CBDC) “Sand Dollar” in 2020, other countries see the CBDC as a lot of risks.

The idea of ​​the “digital dollar” and other digital currencies of the world gained popularity during the COVID-19 pandemic, which has accelerated the trend of moving away from cash and moving to different types of electronic payment.

2020 has also seen a surge in cryptocurrencies such as Bitcoin and Ethereum, which are digital currencies but are not backed by any fiat currency and are not centrally regulated.

Amid concerns of governments about the impact of cryptocurrencies on the financial and economic system, countries have moved from considering the idea of ​​a central bank digital currency (CBDC for short) to a pilot implementation.

What is CBDC and which countries have already switched to digital currency?

A feature of the digital currency of the central bank or CBDC is that it is a national currency, the value of which is dictated by the state authorities of the country, while the digital payment system in which this currency is circulated is also controlled by the state. bodies.

The turnover management of such CBDCs should be independent of commercial banks or large payment companies such as Visa (V) and Mastercard (MA).

In 2020, the Bahamas became the first country in the world to officially issue a central bank digital currency (CBDC) called the Sand Dollar.

The international think tank Atlantic Council has been conducting international research and conferences on the CBDC for several years now, and has drawn up a map showing the position of a particular country.

  • Countries with a pilot CBDC launch are highlighted in orange, which means that the government digital currency is being tested on a small scale in a real environment with a limited number of participants.

  • Blue – Country initiated technical build and early testing of CBDC in controlled environments.

  • Yellow – Research in progress, working groups established to explore the use cases, impacts and feasibility of CBDC.

  • Gray – CBDC project is not under development.

  • Green – CBDC initiative rejected.

  • Black – the CBDC project was not supported by the country’s central bank.

China, with the world’s second largest economy, is actively pursuing the introduction of the digital yuan in 2022 and shifting the dollar from the place of the dominant currency in the world, and its pilot project is well placed to do so. The Chinese people have long abandoned paper money en masse and today, about 85% of transactions in the country are digital. In addition, the country’s government is currently tightening its grip on the fintech sector in an attempt to curtail the power of giants like Ant Group, which is 33% owned by Alibaba Group (BABA).

What is the US position on the CBDC digital currency?

With the arrival of the new US President Joe Biden and the majority of votes in the Democratic Party, the government’s position on the CBDC has changed towards active study, the Trump administration has reacted passively to this initiative.

Last year, the U.S. central bank announced that Boston Federal Reserve Bank staff were conducting research with the MIT Cambridge Digital Currency Initiative to create and test a hypothetical digital dollar. The results of this study will be published this summer.

CBDC in the US has already been dubbed Fedcoin.

Treasury Secretary Janet Yellen said, “It makes sense for central banks to look closely at issuing sovereign digital currencies.”

“Too many Americans do not have access to simple payment systems and bank accounts, and I think this is where the digital dollar, the digital currency of the central bank, can help,” she said. “This could lead to faster, safer and cheaper payments, which is an important goal in my opinion.”

Commenting on the race for primacy in the creation of the CBDC digital currency, Fed Chairman Jerome Powell emphasized that for the United States, as the custodian of the world’s most popular reserve currency, it is more important to be right than the first in this regard.

Yellen, who was the first woman to head the Fed from 2014 to 2018 and is now the first woman to head the US Treasury Department, has a similar position.

She said officials must first address a number of issues, including how the digital currency might affect traditional bank deposits, financial stability, consumer protection, and illegal transactions.

Major US Banks Concerned About Potential CBDC Launch

“The move to implement CBDC could actually disrupt the financial system,” said Chetan Ahya, chief economist at Morgan Stanley, in his client report. “Efforts to implement CBDC are gaining momentum as 86% of the world’s central banks study digital currencies.”

A 2020 poll by the Bank for International Settlements found that around 60% of the world’s central banks are working to validate the CBDC concept, although only 14% have actually launched a pilot program or are under development.

Seeing their profits threatened, a major banking trade group told Congress that the digital dollar was unnecessary.

Visa and Mastercard, for their part, are also trying to negotiate with central banks to make sure new currencies can use their payment networks.

While some economists are calling for a global lead in launching the CBDC, banking and fintech lobby groups are concerned that transaction volumes in their payment systems will plummet if governments take over the digital currency remittance and settlement function.

While some countries, such as Turkey, have recently banned the activities of cryptocurrency exchanges. In the United States, the IPO of the Coinbase cryptocurrency exchange took place recently and a number of international companies such as PayPal (PYPL), Mastercard (MA) and others have launched services for buying and calculating in cryptocurrency.

Pros and cons of implementing CBDC

Launching a CBDC does have a number of challenges, ranging from technical to regulatory and data privacy concerns.

High-ranking US officials referred to the CBDC as risks to the stability of the financial and economic system, and the transformation of the state into a monopoly in the field of deposits, which could undermine the health of commercial banks, and this would be followed by a fall in the private sector of the economy.

In addition, the introduction of the digital dollar could mean that the state will track the monetary transactions of citizens.

However, there are many advantages to the introduction of CBDC, among them: the potential reduction in transaction costs, ensuring the protection of people from the financial instability of private payment systems that can potentially fail.

Thus, the current position of the US Treasury Department and the Federal Reserve regarding the digital dollar suggests that its implementation will be preceded by long conversations with the public and representatives of the banking and financial sectors, followed by discussions in Congress. It will probably take more than a year.

With the publication of a study by the Boston Fed and the Massachusetts Institute of Technology, sample scenarios for the potential implementation of CBDC in the United States will become known.

Regardless, it looks like the US and other countries are seriously developing their own version of digital currencies, and this makes financial sector executives nervous.

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