United States: The CBDC project is Joe Biden's life jacket
Cryptocurrencies have caused an earthquake resulting in tremors that disrupt the concept we have of fiduciary money and how it works. To "combat" cryptocurrencies such as Bitcoin and Ethereum, different states and countries belonging to international organisations are working on their own Central Bank Digital Currencies (CBDC). This probably does not sound too familiar to you, so we are going to explain what these digital currencies issued by a central bank are and how they differ from cryptocurrencies.
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What is a CBDC?
It is a type of digital currency which has been issued by a central bank and which is a digital representation of fiat money. It therefore has the property of being a form of money that is regulated by a state or a union of states. This proposal seeks to solve the problem, especially of costs and infrastructure, which involves the physical version of fiat money (coins and bills)
How do they Work?
The operating mechanisms of CBDCs depend a lot on the technology used for their creation and the needs they intend to cover. They do not have to all be created in the same way or have the same characteristics.
Many central banks currently show interest in blockchain technology and the DLT variant for its development. It is committed to these technologies to minimise the risk of developing monetary systems that only work in digital environments.
Blockchain and DLT are two technological solutions that simplify the construction of interoperability systems with other currencies. Integrations within cryptocurrencies that allow instant exchange between cryptocurrencies with different consensuses are currently being worked on. But they could also benefit from the use of smart contracts to create or deploy different solutions.
What is currently happening in the USA?
President Joe Bien launched the project to create a digital currency issued by the Federal Reserve in an attempt to maintain the role of the world's main reserve currency.
This project seeks to create a “digital dollar”. The president will sign an executive order directing his administration to give "the highest priority to the development and investigation of a possible central bank digital currency" (CBDC) for the United States, according to a statement.
The official announcement of the launch follows several comments from officials calling attention to the need to move forward in competition with cryptocurrencies. Weeks ago, for example, Treasury Secretary Janet Yellen had already expressed the need to create this instrument. In that context, she stated that a digital version of the dollar could help address obstacles to financial inclusion in the United States among low-income households.
"Too many Americans don't have access to easy payment systems and bank accounts, and I think this is something that a digital dollar, a central bank digital currency, could help with," she remarked. “It could result in faster, safer and cheaper payments, which I think are important goals,” she added.
The United States has been studying the project for some time, but until now had not coordinated efforts to launch a digital dollar. The US central bank announced last year that staff members at the Federal Reserve Bank of Boston were conducting research in conjunction with the MIT Digital Currency Initiative in Cambridge, Massachusetts, looking to build and test a hypothetical digital dollar.
States want to avoid giving space to private actors or foreign powers, losing the ability to conduct sovereign monetary policies. Officials generally see opportunities and risks, and many central banks have moved slowly to embrace the idea, while China proceeds with testing a digital yuan pilot.
However, for the White House there are also potential risks and drawbacks to consider in the project, which is why the president insisted on the need to prioritise timely evaluations of potential benefits and risks under various designs to ensure that the United States remains a leader in the international financial system.
Within 180 days, the Secretary of the Treasury, in consultation with the Secretary of State, Attorney General, Secretary of Commerce, Secretary of Homeland Security, Director of the Office of Management and Budget, Director of National Intelligence and the heads of other relevant agencies, will present to the President a report on the future of money and payment systems, including the conditions driving the widespread adoption of digital assets.
In addition, Biden encouraged Federal Reserve Chairman Jerome Powell to continue researching and reporting on the extent to which CBDCs could improve the efficiency and reduce costs of existing and future payment systems, to assess the optimal way to United States CBDC, and to develop a strategic plan for the Federal Reserve and the United States Government.
He also stressed that the United States should ensure safeguards are in place and promote responsible development of digital assets to protect consumers, investors, and businesses; maintain privacy; and guard against arbitrary or illegal surveillance, which can contribute to human rights abuses.
Jerome Powell expressed himself in this regard, maintaining that the interest of the United States now is to preserve the currency as a global reserve of value. For now, the Fed has concluded the four-month period to collect information on the viability of a digital dollar, unlike Europe, which is already in the advanced stages of the digital euro.
Powell emphasised the following about the importance of a CBDC in boosting the dollar:
“To summarise, I would like to emphasise the importance of the dollar to the economies and financial markets of the United States and the world. It is essential that we understand the channels, the connections and the effects of the role of the dollar.”
Since March, Jerome Powell had pointed out that cryptocurrencies would require new rules, since the existing regulatory framework cannot take into account market innovations and argued that the crypto market and associated technologies could have positive effects, but that they would need the creation of new rules.
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