Federal Reserve Conference Casts Doubt over Digital Dollar Project

Panelists at the Federal Reserve’s first conference on the international role of the dollar, are not impressed with the prospect of a US Central Bank Digital Currency (CBDC).

According to a report published on Tuesday, July 5, regarding the conference in June, a panel examining digital assets pointed out that a US-issued CBDC is unsatisfactory because it fails to live up to Fed’s expectations. Furthermore, the panellist identified that the lack of a regulatory framework holds down institutional investment in cryptocurrencies.

The Fed’s summary highlighted: “Panelists generally agreed that technology by itself would not lead to drastic changes in the global currency ecosystem, as other factors such as the rule of law, stability, network effects, and the depth of markets are crucial for the advantages held by dominant currencies.”

According to the review, many tasks are still required to create a more comprehensive policy framework for digital assets to support the development of private-sector stablecoin alternatives to a government-issued digital dollar to adopt a more proactive mindset in countering risks threatening the dollar’s dominance.

The review also refuted claims that foreign currencies, particularly China’s digital yuan or digital assets, pose threats to the US dollar in the international scene. The report described the scope of cross-border CBDCs as still quite limited. According to the report, people are not flocking to the Chinese digital yuan or the Nigerian e naira simply because they’ve gone digital. However, the review pointed out research suggesting that a major market for cryptocurrency comes from efforts to evade capital controls, especially in China’s stringent regime.

The report highlighted the importance of the US CBDC to improve the speed of payments, financial inclusion, and the dollar’s international status. Such a goal can be achieved if there is a private-public collaboration to help develop networks that speed up payments. Financial inclusion can be established if the CBDC technology makes banking more accessible and therefore decreases the number of unbanked households. In this way, the CBDC would help the unbanked while improving the dollar’s international status.

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Brazil Considers CBDC Project as a Means to Innovate Digitally: Economist

The development of a Central Bank Digital Currency (CBDC) means several things to several people, and for Brazil, it is a broad complement to its already transforming payment ecosystem. 

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According to Fabio Araujo, an economist at the Central Bank of Brazil (CBB), the move to develop a Digital Real is fueled by many reasons. The reasons primarily involve providing “entrepreneurs with a safe and reliable environment to innovate through the use of programmability technologies, such as programable money and smart contracts.”

Fabio maintained the fact that the payment landscape in Brazil is already very advanced and the embrace of very fast digital payment models has been in the works for more than 20 years. While Fabio does not believe the payment landscape needs any revolutionary revamping, he believes the CBDC must add more value beyond efficient payments.

“In the context of a modern payment system, already available to the Brazilian population, a full-fledged CBDC must enable new functionalities beyond those brought by an instant payment arrangement. Therefore, the innovation tool for which the BCB envisions the greatest potential is developing a platform for smart payments,” he wrote in a recent publication from the Bank for International Settlements (BIS).

Embracing Crypto-Backed Innovations 

In the paper, Fabio said cryptocurrencies are already a reality. He highlighted that the technologies are so novel that they can benefit a large number of citizens if given the appropriate regulatory oversight.

“Asset tokenisation and the issuance of digital assets is a reality. It is up to regulators to provide a safe environment so that entrepreneurs can propose innovations and a larger base of citizens can benefit from these technologies, without exposure to the uncertainties of an unregulated financial environment,” he posited.

While the CBB is still in the earliest stages of its Digital Real pursuit, it is one of the apex banks’ fast-tracking events in this light, which recently partnered with Mercado Bitcoin and Stellar blockchain networks to accelerate efforts on the project.

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Digital Dollar’s Benefits Could Affect Financial Stability & Privacy: US Fed

The US Federal Reserve said that the introduction of an official digital version of the U.S. dollar could benefit Americans but it may also potentially affect financial stability and privacy.

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Although the Fed’s long-awaited discussion paper did not make any policy recommendations nor did it give a clear signal for the launch of a central bank digital currency (CBDC), it did provide an insight saying that the digital US dollar could provide Americans with more payments options that are speedier.

The Fed also said that it is not ready to proceed with creating a CBDC, a digital form of cash, “without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.” But the talks have set a stage for the central bank to collect public feedback on the potential costs and benefits of a CBDC, which could ultimately advance legislation long-term, Reuters reported.

The discussion comes at a time when central banks across the globe are already exploring the adoption of digital currencies, while countries like Nigeria have already launched their own version of a CBDC known as eNaira.

“While a CBDC could provide a safe, digital payment option for households and businesses as the payments system continues to evolve, and may result in faster payment options between countries, there may also be downsides,” Fed officials wrote.

According to the Fed, challenges surrounding the digital dollar include maintaining financial stability and creating an ecosystem that would “complement existing means of payment.” 

Prior to the introduction of the digital dollar, other obstacles that need to be tackled by the central bank are major policy questions such as ensuring a CBDC does not violate Americans’ privacy and for the government to maintain its “ability to combat illicit finance.”

Unlike cryptocurrencies, which are typically run by private companies, a CBDC would be issued and backed by the central bank.

According to Reuters, the CBDC would differ from electronic transactions that happen through large commercial banks in that it could give consumers a direct claim to the central bank, similar to physical cash.

Although the use of popular CBDCs such as the digital Euro, yuan or dollar could massively change the structure of the global financial system, the introduction of these currencies still has a long way to go.

According to the Atlantic Council, about 90 countries are exploring or engineering the launch of their CBDCs.

The U.S. is still lagging behind in the CBDC competition and the Fed Governor Lael Brainard said it is not “sustainable” for the US to hold off on pursuing a digital dollar at a time when competing economies are moving ahead.

Meanwhile, the world’s second-largest economy China has witnessed fast growth in its CBDC.

The e-CNY is growing at a fast pace as data released by Zou Lan, director of the Peoples Bank of China (PBoC) financial markets department revealed the new legal tender has inked a total of $13.68 billion in transactions since public trials began, Blockchain.News reported citing CNBC.

As per CNBC’s report, the performance figures released by the PBoC also showed that the total number of citizens that are now using the digital yuan has topped 261 million per a CNBC report.

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Mexican Central Bank Reveals CBDC Distribution in 2024

Banco de México, the Central Bank of Mexico, has revealed that its projected Central Bank Digital Currency (CBDC), dubbed the Digital Peso, will be up for public distribution by 2024.

This timeline was revealed through the official Twitter accounts of the central bank as well as that country’s president. The tweet reads:

“The @Banxico reports that by 2024 it will have its own digital currency in circulation, considering these new technologies and the next-generation payment infrastructure are extremely important as options of great value to advance financial inclusion in the country.”

Mexico has been very conservative in pursuing a CBDC compared to other more vocal Central Banks worldwide. With little detail to draw on from the shared tweet, the Mexican apex bank is likely trailing its counterparts in riding the train in relation to backing new financial technologies in a bid to drive more financial inclusion

According to the International Monetary Fund (IMF), there are about 110 Central Banks worldwide currently working on developing their own CBDC. Many monetary watchdogs see CBDCs as a tool to wade off the influence of prominent digital currencies such as Bitcoin (BTC), Ethereum (ETH), and stablecoins. 

The Chinese government echoed this sentiment in more ways than one this year. It advanced its CBDC trails under many retail settings while also stemming the potential competition from BTC through an emphatic and comprehensive ban. Except for the Central Bank of the Bahamas, Nigeria, the other country known to have a functional CBDC in circulation also has an unfavourable regulation in place to taper down on the dominance of Bitcoin and altcoins in the country.

The race to float a CBDC is on track to take a new turn in the coming year as the entirety of research and development work by central banks in this regard is billed to gain expression.

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Bank of Jamaica Mints First Tranche of CBDC

The Bank of Jamaica (BOJ) has registered a new milestone in its Central Bank Digital Currency (CBDC) in pursuing the first batch of its Digital Jamaican Dollar.

The project, under development by the BOJ’s CBDC Team, has entered a pilot phase which will see a total of J$230 million in CBDC minted and deposited with deposit-taking institutions and authorised payment service providers before December 2021.

The emergence of the Jamaican Digital Dollar has been touted by various government officials, including the Minister of Finance and the Public Service, Dr. The Hon. Nigel Clarke, as crucial in developing the digital economy in the country. The CBDC is also billed to foster financial inclusion amongst all citizens.

“The anticipated benefits of CBDC for Jamaican citizens, businesses and the Government include increased financial inclusion, as it will provide another, easier-to-access means of efficient and secured payments. For deposit-taking institutions and BOJ itself, CBDC presents an opportunity to improve cash management processes and costs,” the Bank of Jamaica said in its published press release.

According to BOJ Governor Richard Byles, the next stage for the country’s CBDC project is to push for mainstream adoption by Jamaican citizens. The appropriate legal framework to back the emergence of the Jamaican dollar will be rolled out as promised by the Finance Minister.

The pursuit of CBDC appears to be taking a great leap in the Caribbean Island nations. The Central Bank of the Bahamas came off as the first in the world to float its CBDC, the Sand Dollar, back in October 2020. Other nations in regions including Europe and Asia are also advancing in the pursuit of these new forms of money, with unique regulations and use cases being worked out by the appropriate monetary authorities in each country.

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About 90 Percent of Countries Representing the Global Economy Exploring CBDCs, Report says

The pursuit of a Central Bank Digital Currency (CBDC) has seen more countries joining the exploration of the new financial technology in 2021 than in the previous year.

According to the testimony to Congress by Julia Friedlander, the Senior Fellow of the C.Boyden Gray Center, a body tasked with conducting researches centred on economic advancements, including financial regulations, the CBDC race has seen about 81 nations, more than double the number of countries exploring the digital fiat currency system this year, with the United States featuring alongside.

Through the centre’s work, Friedlander noted that the total number of countries currently exploring CBDCs represents as much as 90% of the world’s economy. She, however, pointed out that the United States is lagging in taking the innovative lead as it concerns CDBC pursuit, a situation she believes could make the US “miss out on an opportunity to foster financial inclusion, increase cybersecurity, and maintain dollar dominance.” 

While the Central Bank of the Bahamas has broken record as the first to launch a full-fledged CBDC, the Sand Dollar, sometime last year, China is amongst the major economies with a remarkable advancement in digital fiat development race. However, in Friedlander’s testimony, the US Federal Reserve lags behind the other three other dominant central banks, including the European Center Bank, the Bank of Japan, and the Bank of England. It is carving out a definitive path for its CBDC.

With a growing embrace of privately issued digital currencies, including Bitcoin (BTC), Ethereum (ETH), and Stablecoins in payment systems, world monetary watchdogs are in a frantic race to revolutionise existing payment systems to compete with these cryptocurrencies. On the part of the United States Federal Reserve, the Friedlander testimony pointed out that the Digital Dollar pursuit is not “solely the responsibility of the Federal Reserve or Treasury, but rather, because the issues impact both the US and global economy, the responsibility rests with all parts of the government.”

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US Fed Aims To Publish Discussion Paper on CBDC This Summer

The United States Federal Reserve appears more committed to changing the payments landscape by using emerging technologies. The US Fed Chairman Jerome Powel said the Central Bank Digital Currency (CBDC) design would “raise important monetary policy and financial stability”.

A video message released by the Fed Chairman, Jerome Powell, said it was made known that the apex banking body has been monitoring the advances in the tech landscape. This is also accompanied by how it shapes the payments ecosystem and the Fed’s response to these developments.

“As the central bank of the United States, the Federal Reserve is charged with promoting monetary and financial stability and the safety and efficiency of the payment system,” Powell said in the video message. “In pursuit of these core functions, we have been carefully monitoring and adapting to the technological innovations now transforming the world of payments, finance, and banking.”

The Fed acknowledged that new technologies provide opportunities for central banks, per the Central Bank Digital Currency (CBDC). The Federal Reserve has commenced research on exploring the upsides of developing and issuing a CBDC. The Fed’s objective is to see if a CBDC can complement existing systems and serve the needs of households and businesses.

“We think it is important that any potential CBDC could serve as a complement to, and not a replacement of, cash and current private-sector digital forms of the dollar, such as deposits at commercial banks,” Powell said. “The design of a CBDC would raise important monetary policy, financial stability, consumer protection, legal, and privacy considerations and will require careful thought and analysis—including input from the public and elected officials.”

The US Federal Reserve said the authority would publish the discussion paper this summer to advance its goals. Powell noted that the paper would seek to “explore the implications of fast-evolving technology for digital payments, with a particular objective, focusing on the possibility of issuing a U.S. central bank digital currency.”

The US may be lagging behind China, entering its advanced retail testing phases for its digital Yuan CBDC project. However, the North American giant is committed to getting the foundation of the Digital Dollars right, seeking further dominance as the world’s major reserve currency.

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Digital Dollar Project to Begin Pilot Testing to Gather Data for CBDC

The Digital Dollar Project has announced it will begin a pilot test for a Central Bank Digital Currency (CBDC) in the United States.

According to the official announcement, the primary goal of the Digital Dollar pilot test will be to “address some common challenges faced by different stakeholders, including consumers, businesses, financial institutions, and fintech,” with a defined set of use cases outlined.

According to the highlights, the pilot program has detailed a number of models that will serve as a basis for the general testing. Some of these include but are not limited to the tokenization of the digital dollar to make it a true instrument, ensuring that it is issued by the Federal Reserve, and ensuring that it is supportive and complementary to additional payment sector innovation.

The United States is somewhat lagging behind other major economies in the pursuit of a Central Bank Digital Currency. Jerome Powell, the Federal Reserve Chairman has often reiterated the need to get the digital dollar right, rather than early, a move that is understandable seeing that the US Dollar is the world’s reserve currency. This will make digitizing the currency a different approach from other countries’ CBDC programs.

With China in the advanced stages of its CBDC program, experts have warned that delaying the US CBDC push may make the country fall behind the Asian giant, which competes with the US for economic dominance.

With the launch of the Digital Dollar pilot test, however, the United States appears to be on the right track for the proposed CBDC development. Christopher Giancarlo, co-founder of the Digital Dollar Foundation said the pilot project will be to push for real-world data, an element that has been significantly lacking in the digital dollar pursuit. 

“There are conferences and papers coming out every week around the world on CBDCs based on data from other countries. What there is not, is any real data and testing from the United States to inform that debate. We’re seeking to generate that real-world data.”

While the pilot will run for the next 1 year, no timeline is defined for the issuance of the Digital Dollar.

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Federal Reserve Chair Powell Affirms There Is Ongoing Research for a Digital Dollar

The United States Federal Reserve Chairman Jerome Powell has confirmed that the Central Bank is undergoing large-scale research and development on the digital dollar.

As reported by Bloomberg, Powell’s confirmation of the Federal Reserve’s digital dollar engagement does not imply that questions bordering on whether one will be launched have been resolved.

“It’s a very, very large, complex project. And, you know, this is really just table stakes,” Powell said in an interview with “60 Minutes” on CBS. “This is understanding the technology and the possibilities so that you can really address the policy issues.”

The financial ecosystem has changed over the past years as more Americans are beginning to interact with privately issued digital currencies and stablecoins. With other existing alternatives being made available to conduct transactions, the impact of the Dollar is gradually declining and this is seen by some stakeholders as the perfect time to issue a compatible digital currency backed by the government. The Federal Reserve is however yet to determine whether a digital dollar will benefit the people.

“We have not made a decision to do this because, again, the question is will this benefit the people that we serve?” Powell said. “And we need to answer that question well. And we need to involve the public and Congress deeply in that process because it would be an important step if we were to do this.”

Back in 2020, the Office of the Comptroller of the Currency (OCC) allowed National Banks to keep custody of stablecoins, a move that marked a new shift in the country’s stringent stance about digital currencies. Today, the Federal Reserve officials say they are exploring ways in which a government-backed digital currency will integrate with today’s current monetary landscape per its effect on deposit insurance, and access to the Fed for emergency liquidity among others.

While answering these questions may slow down the drive towards the rollout of a digital dollar, the ultimate goal will be to get the process right, and not to follow the bandwagon.

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