CBDC: Why a digital dollar could take years to develop

US Treasury sees a minefield of problems with rolling out a cryptocurrency from the Federal Reserve.
Written by Liam Tung, Contributing Writer

The US secretary of the Treasury Janet Yellen has given a bit more insight into how regulation of digital assets like crypto and central bank digital currencies (CBDCs) could develop.

Digital assets have grown explosively, reaching a market cap of $3 trillion last November from $14 billion just five years prior, she said.

Digital currency is a hot topic for the US government: last month saw  president Joe Biden's executive order on digital assets. Biden wants the US to lead in a space that China is far more advanced in with its digital Yuan projects. 

"As a liability of the central bank, a CBDC could become a form of trusted money comparable to physical cash, but potentially offering some of the projected benefits of digital assets," said Yellen

A CBDC normally would be issued by a nation's central bank. The US Federal Reserve is investigating the pros and cons of creating one. Biden's order urges the Fed to accelerate its research and instructs Treasury to produce a report on the "future of money". 

The Fed's whitepaper acknowledged concerns that non-US CBDCs could threaten the dominance of the US dollar in international trade if a particular CBDC became popular. The central banks of Australia, Malaysia, Singapore, South Africa and the Bank for International Settlements (BIS) have been weighing up cross-border payments from separate CBDC platforms.   

Meanwhile, a bill in the House of Representatives from March asks Treasury to roll out e-cash as an interim compliment to an actual CBDC from the Federal Reserve. It aims to accelerate the US's digital asset plans but optimistically hopes to create a digital payment system that is as private as cash -- something that a CBDC issued by the central bank cannot promise. 

Yellen said Treasury's report on the future of money will analyze "possible design choices related to a potential CBDC and implications for payment systems, economic growth, financial stability, financial inclusion, and national security." 

And don't expect a quick decision. Yellan noted: "I don't yet know the conclusions we will reach, but we must be clear that issuing a CBDC would likely present a major design and engineering challenge that would require years of development, not months." 

She also highlighted that innovation doesn't always deliver benefits to people equally. 

"Innovation that improves our lives while appropriately managing risks should be embraced. But we must also be mindful that 'financial innovation' of the past has too often not benefited working families, and has sometimes exacerbated inequality, given rise to illicit finance risks, and increased systemic financial risk," she said. 

"Our regulatory frameworks should be designed to support responsible innovation while managing risks – especially those that could disrupt the financial system and economy," said Yellen.  

"As banks and other traditional financial firms become more involved in digital asset markets, regulatory frameworks will need to appropriately reflect the risks of these new activities. And, new types of intermediaries, such as digital asset exchanges and other digital native intermediaries, should be subject to appropriate forms of oversight." 

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