A surprising digital dollar asset had a great 2022 and it wasn’t cryptocurrency.
While last year saw the value of the cryptocurrency market shrink to $1.4 trillion from a high of $3 trillion in 2021, governments around the world have increasingly experimented with a different form of digital cash: a national legal tender.
Perhaps fearing that the future of money might elude them, central banks in 114 countries embarked on a series of investigative programs last year to research, and even implement, the feasibility of issuing sovereign virtual currencies backed by a federal banking system .
As of December 2022, all G7 economies have now moved into the stage of developing a central bank digital currency (CBDC).
Money is no longer paper
A CBDC is electronic, rather than physical, money backed and issued by a sovereign nation.
Compared to cryptocurrency tokens, which are digital assets of stored value, CBDCs serve as true legal tender.
As reported by PYMNTS, a recent multi-year project by the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology’s (MIT) Digital Currency Initiative demonstrated the technical feasibility of a US CBDC.
Further project results will be published in early 2023.
Separately, the New York Federal Reserve is conducting a “watershed” digital currency project with a consortium of major commercial financial institutions, including BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, Truist, US Bank, TD Bank, and Wells Fargo.
“We strongly agree with the Federal Reserve’s view that, provided the creation of a CBDC is deemed justified, a brokered (two-tier) distribution model is preferable for the needs of the US economy, as preserves the role of financial intermediaries and payment service providers, using existing resources,” Mastercard, one of the New York project participants, said in a public statement.
Holding and transferring money digitally is nothing new for consumers or businesses, who have relied on bank accounts, online transactions and payment apps for years.
However, the forms of money used in such digital transactions are usually the liabilities of commercial banks and other private entities.
A CBDC-issued digital dollar would instead be a liability of the Federal Reserve, just like paper currency is.
The benefits offered by a CBDC include ultra-fast settlement speed and much higher transaction volume processing than most options available today, including settlements on both bitcoin and ethereum blockchains.
Research from the Boston Fed established a technical baseline for CBDC transactions between 170,000 and 1.7 million transactions per second. The project was able to successfully complete almost all transactions (99%) in less than five seconds.
Observers of the process said this highly efficient “real-time” settlement speed could revolutionize both money and payments.
Personal freedom and economic freedom
In March 2022, President Joe Biden signed an executive order requesting American leadership in exploring the possibilities of the CBDC.
Despite this show of presidential support, the Federal Reserve’s CBDC initiatives are meeting with controversy on Capitol Hill.
While bitcoin, the best known and most widely used cryptocurrency, is a politically neutral monetary system whose decentralized, peer-to-peer nature prohibits identity tracking and does not collect personal information, on the other hand CBDCs are viewed by some as representing the opposite of the “freedoms” of cryptocurrencies due to their implied government ties.
This has led to growing fears among some observers that the Federal Reserve could use CBDCs to collect personal information about citizens and, in turn, leverage those digital dollar transactions as a surveillance tool to track certain individuals or subgroups of the population, even going as far as to block accounts or prevent certain purchases.
As a result of these concerns, Minnesota Congressman Tom Emmer, the ranking Republican of the House Financial Services Subcommittee on Oversight and Investigations, introduced a bill banning the Federal Reserve from issuing a CBDC directly to individuals.
The proposed legislation has been read twice and referred to the Committee on Banking, Housing and Urban Affairs, where it awaits further action.
Emmer did not respond to a PYMNTS request for comment.
At a time when a cocoa farmer in Central America can communicate digitally in real time with wholesale and retail customers around the world, it may seem archaic to continue moving money through systems and infrastructure designed for the paper money era .
Eleven countries have already put their own digital currencies into circulation, including the Bahamas, Jamaica and Nigeria.
The US Fed’s feasibility projects, both completed and ongoing, have indicated, in clear language, that they are “politically agnostic” and intended only to explore any potential benefits and risks of CBDCS, not to influence legislation.
In a commentary to PYMNTS earlier this month, a Boston Fed spokesperson stressed that their research work on CBDCs was “purely academic.”
The Federal Reserve has made no decision on whether to pursue, much less implement, a CBDC and it remains to be seen whether this stoic stance will change in 2023.
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