The U.S. Federal Reserve has just divulged new information on its stance towards CBDCs.
For the past year, numerous nations around the world have announced their intentions to research, and eventually launch a central bank digital currency (CBDC). The reasons are varied, but usually boil down to a few key factors, which include the ability to:
Increase efficiency – Reduced costs with quick settlement times
Reduce fraud/illegal activity – KYC/AML
Be more transparent -- Ledger based transaction histories
If these reasons weren’t enough justification for looking into the use of a CBDC, COVID struck, and highlighted a serious deficiency associated with current FIAT.
Fiat Spreads Germs – China and the U.S. each had instances in which legal tender was taken out of circulation, requiring decontamination.
Before we go any further, everyone should understand what a CBDC is on a basic level. As its name would imply, a CBDC is a digital currency which has been issued by the central bank of any given nation. In the United States, a future CBDC is commonly referred to as a ‘Digital Dollar’.
These digital currencies are essentially a blockchain based variant of current currencies, such as the dollar. By utilizing blockchain, and existing as a virtual asset, CBDCs are more easily controlled, monitored, and transacted.
To learn more about what makes a CBDC tick, we recently took a closer look at their inner workings, HERE.
Years in the Making
With the increased attention being afforded to CBDCs, Governor Lael Brainard, of the Federal Reserve, took the time to address their development in a recent speech.
“We have been conducting in-house experiments for the last few years, through means that include the Board’s Technology Lab, which has been building and testing a range of distributed ledger platforms to understand their potential opportunity and risk.”
While the Fed may have kept quiet over the past few years on its plans for a digital dollar, it is promising to hear that they have been busy behind the scenes. Many have feared that the Fed will fall behind other nations in the development of such a product. Governor Brainard allayed these fears, stating,
“Given the dollar’s important role, it is essential that the Federal Reserve remain on the frontier of research and policy development regarding central bank digital currencies…Like other central banks, we are continuing to assess the opportunities and challenges of, as well as the use cases for, a digital currency, as a complement to cash and other payments options.”
Why Develop a CBDC?
Now that we know development is underway, and has been for some time, what is the Feds reasoning behind this?
Although many are aware of the potential benefits afforded by CBDCs, Governor Brainard touched on a few reasons in particular, which have steered the Feds actions. These include:
COVID 19 – It has been well publicized throughout the pandemic, that millions of U.S. citizens experienced significant delays in receiving their stimulus cheques. The Fed has kept a close watch on spending habits, and based on what it sees, this is clearly money that is needed, but is not being doled out in an efficient manner. Governor Brainard underscored this point, stating, “The COVID-19 crisis is a dramatic reminder of the importance of a resilient and trusted payments infrastructure that is accessible to all Americans”
Bitcoin and Libra – Since its launch in 2009, Bitcoin has been a divisive asset. Some view it as the currency of the future, others as a replacement for gold, and even those that still believe it will crash spectacularly. Regardless of Bitcoin’s fate, the ideologies that drive it, and the capabilities it has demonstrated have captivated many. Beyond simply catching one’s attention, Bitcoin has provided a potential blueprint for what a future currency should look like. Countries no longer need to fear solely other nations leapfrogging their status, but a potential shift in power towards autonomous and decentralized protocols like Bitcoin. Governor Brainard specifically noted issues and questions surrounding the rise of digital currencies, stating, “The introduction of Bitcoin and the subsequent emergence of stablecoins with potentially global reach, such as Facebook’s Libra, have raised fundamental questions about legal and regulatory safeguards, financial stability, and the role of currency in society. This prospect has intensified calls for CBDCs to maintain the sovereign currency as the anchor of the nation’s payment systems.”
China – Despite many countries each developing CBDCs, the only country which was specifically named in Governor Brainard’s speech was China – however brief. It was noted that “China has moved ahead rapidly on its version of a CBDC.” As China continues to grow, and develop into an even greater world-superpower, it is imperative that the United States maintains pace with such technological progress, if it is to maintain its grip on the top spot.
In addition to elaborating on past and current efforts surrounding CBDCs, the Fed also announced a new collaboration with the Massachusetts Institute of Technology (MIT).
“…the Federal Reserve Bank of Boston is collaborating with researchers at the Massachusetts Institute of Technology on a multiyear effort to build a hypothetical digital currency oriented for central bank use. This research project is intended to support the Board’s broader efforts in assessing the safety and efficiency of central bank digital currency systems. The project focuses solely on developing an understanding of the capacities and limitations of the relevant technologies, rather than serving as a prototype for a Federal Reserve issued digital currency or addressing the wide-ranging policy issues associated with its potential issuance.”
MIT has long been associated with blockchain based endeavours, and is ideally equipped for a collaboration such as this. In fact, this multi-year research effort will be spearheaded by MIT’s ‘digital currency initiative’ – a program structured to develop both, an understanding of, and practical uses cases for blockchain.
Massachusetts Institute of Technology (MIT)
MIT is a world-renowned research university, based in Boston, Massachusetts. The university was originally founded in 1861, and continues to this day with a focus of fields such as science and technology.
Operations at MIT are currently overseen by President, L. Rafael Reef.
The Federal Reserve
The Federal Reserve of ‘Fed’, is the central bank of the United States. While the roles and responsibilities of the Fed are vast, they are all structured around ensuring/facilitating a healthy economy.
Operations are overseen by the Board of Governors, with Governor Brainard currently serving as Chair.