The regulatory environment for central bank digital currency (CBDCs), is beginning to take shape, but it’s not clear how to move forward, at least in the US.
There are many key questions that still remain.
How should central banks, and especially the Federal Reserve, issue and monitor digital currencies? What role would traditional banking players play? Would the CBDCs be used to make wholesale or retail payments, or both?
While much may have been laid out (and some questions may remain unanswered), the Fed published its paper on CBDCs. However, depending on where you look the regulatory ball is still rolling.
At least some pressure is required to accomplish this. NotTo eliminate intermediaries from the process.
The Federal Reserve would be forbidden from issuing digital currency from the central bank directly to individuals, as proposed by Tom Emmer (Minnesota Republican Congressman). An amendment to the Federal Reserve Act would add section 13 to prohibit the Federal Reserve Act from offering products or services directly. It also prohibits the Federal Reserve Act from maintaining an account for an individual or issuing CBDCs directly to an individual.
You can read more here Congressmans Bill To Ban Feds CBDC Will Heat Up Debate
In this instance, there would be a CBDC. However, data privacy concerns remain paramount. The Emmers bill would prevent the central bank becoming a retail bank. As the congressman claimed Last week, in a statementThe Fed would require users to open an account with the Fed in order to access the U.S. CBDC. This would be a dangerous step similar to China’s digital authoritarianism. It is important that the Fed does have the authority not to offer retail bank accounts. Any CBDC that is implemented by the Fed must remain open, anonymous, and private. This means that all digital dollars must be open to all, can transact on a blockchain transparent to all, and retain the privacy aspects of cash. The statement that the CBDC must remain open and private leaves space for traditional financial players to be included.
Wholesale, Retail, or Both
The debate about whether CBDCs should go to wholesale or retail customers is another issue. We’ve seen a hybrid approach in China where the central bank launched apps to allow CBDCs/wallets to be sent to Google and Apple online stores. A number of pilots have been implemented across the country and include wholesale and retail payments ahead for a wider rollout that will target the 2022 Olympics.
As noted by CNBC TuesdayThe digital yuan has recorded $8.2 billion in transactions over the past six months (Jan. 18), far more than apps like Alipay. According to the Peoples Bank of China (PBOC), more than 260,000,000 people have digital wallets available to accept and use digital currency.
There is a strong desire for businesses to use digital currencies for wholesale payments. PYMNTS’ own research shows that 58% use cryptocurrencies. Around a third use stablecoins. We note that this could make it a natural progression to CBDCs. Recent research has shown that CBDCs are able to reduce cross-border settlement time and costs.
Also, read:Study: 58% Multinational Firms Use Cryptocurrencies
This is not to say that cryptos will be eliminated completely, but in some countries (India and China among them), there have been widespread crackdowns against bitcoin and other cryptos.
It is possible that there is a natural gravitation away cryptos because of macro concerns. As CBDCs gain ground, and as interest rates rise, it may be possible for CBDCs to be more widely accepted.
Morgan Stanley reports Coindesk relayed this informationAccording to Sheena Shah (head of cryptocurrency research at banks), crypto markets are declining as central banks try to raise rates. This was stated in a report published last Wednesday.
There is no consensus on CBDCs. This raises basic questions about interoperability. A committee from the House of Lords in the United Kingdom, for instance, concluded that CBDCs are not necessary. Other central banks are still in research. Only small economies like Barbados have been able to launch their own CBDCs. But China is still waiting and could light a fire under other major economies.
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