An amazing dollar digital asset had a great 2022 and it wasn’t a cryptocurrency.
While the value of the crypto market shrank to $1.4 trillion last year from its peak of $3 trillion in 2021, governments around the world have increasingly experimented with a different form of digital money: a national legal tender.
Perhaps fearing that the future of money may go unnoticed, central banks in 114 countries have been conducting a variety of research programs over the past year investigating, and even acting on, the feasibility of issuing bank-backed sovereign virtual currencies. federal. .
As of December 2022, all G7 economies have moved into the development stage of a central bank digital currency (CBDC).
money is no longer paper
A CBDC is electronic money, rather than physical, backed and issued by a sovereign nation.
Compared to cryptocurrency tokens, which are stored-value digital assets, CBDCs act as true legal tender.
As PYMNTS reported, a recent multi-year project by the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology (MIT) Digital Currency Initiative has demonstrated the technical feasibility of a US CBDC.
More project findings will be published in early 2023.
Separately, the New York Federal Reserve is pursuing a “watershed” digital currency project with a consortium of leading commercial financial institutions, including BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, Truist, US Bank, TD Bank and Wells Fargo.
“We fully agree with the Federal Reserve’s view that, whenever the creation of a CBDC is determined to be warranted, a brokered (two-tier) distribution model is preferable for the needs of the US economy. ., as it preserves the role of financial intermediaries. and payment service providers, while using existing resources,” Mastercard, a participant in the New York project, 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 those digital transactions are generally the responsibility of commercial banks and other private entities.
Instead, a digital dollar issued by CBDC would be a liability of the Federal Reserve, just like paper money.
The benefits offered by a CBDC include ultra-fast settlement speed and much higher transaction volume processing compared to most options available today, including settlements on the bitcoin and ethereum blockchains.
Research by the Boston Federal Reserve established a technical benchmark for CBDC transactions of 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.
Trial observers 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 calling for American leadership in exploring the possibilities of CBDCs.
Despite this show of presidential support, the Federal Reserve’s CBDC initiatives are generating controversy on Capitol Hill.
While bitcoin, the best-known and most widely used cryptocurrency, is a politically neutral monetary system whose peer-to-peer decentralized nature prohibits identity tracking and does not collect personal information, CBDCs are seen by some as representing the opposite of “freedoms.” of cryptocurrencies due to their implicit government ties.
This has raised growing fears among some observers that the Federal Reserve could use CBDCs to collect personal information from citizens and, in turn, leverage those digital dollar transactions as a surveillance tool to track certain individuals or subsets of the population. , even going so far as to freeze accounts or prohibit certain purchases.
As a result of these concerns, Minnesota Congressman Tom Emmer, the ranking Republican on the House Financial Services Subcommittee on Oversight and Investigations, introduced a bill that prohibits the Federal Reserve from issuing a CBDC directly to people.
The proposed legislation was read twice and referred to the Committee on Banking, Housing and Urban Affairs, where it awaits further action.
Emmer has not responded to a request for comment from PYMNTS.
At a time when a cacao farmer in Central America can digitally communicate 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 era of paper money.
Eleven countries have already put their own digital currencies into circulation, including the Bahamas, Jamaica, and Nigeria.
The US Federal Reserve’s feasibility projects, both completed and ongoing, have indicated, using clear language, that they are “policy agnostic” and are only intended to explore potential benefits and risks of CBDCS, not to influence legislation.
In a comment to PYMNTS earlier this month, a spokesperson for the Boston Fed stressed that its research paper on CBDCs was “purely academic.”
The Federal Reserve has made no decision on whether to pursue, let alone implement, a CBDC and it remains to be seen if that stoic stance will change in 2023.
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