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CBDC...the moves of multiple countries, most prominently China, in the central bank digital currency (CBDC) space has intensified talk about how aggressively the Fed should move. China’s progress has stirred worries that it could undermine the dollar’s position as the global reserve currency.
Powell referenced the growing popularity of digital currencies like bitcoin, though he said they remain inefficient payment mechanisms. Stablecoins, which are tied to specific currencies, offer other advantages.
“Technological advances also offer new possibilities to central banks — including the Fed,” Powell said. “While various structures and technologies might be used, a CBDC could be designed for use by the general public.”
© 2015 Mutual Fund Observer. All rights reserved.
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When I first read Powell’s commentary, my initial thought was… I wonder if they’ll create something called a “debit card” where you could pay for goods with a currency that was tied to the fiat in your digital bank account… Wait - I thought we had that. Maybe I’m missing something…
A nationalized central digital bank. I wonder how the current banking system will react to this development that is projected to take 3 years or so to develop. It will be interesting to watch. It seems the train has already left the station.
CBDCs hold more promise for offering something secure and socially useful. Here is a quick look at a few potential benefits: Digital Dollars
In 2020, China started real-world trials for the digital yuan in several major cities.
Increasing international use of the yuan is one of their primary goals.
This may potentially threaten the U.S. dollar's position as the world's reserve currency.
The U.S. should conduct a thorough cost/benefit analysis to determine if the usage of "digital dollars" would be advantageous.
Once your cash becomes nothing more than a digital entry in some governmental database you may be relieved of it instantaneously, legitimately or not, perhaps without a trace of whatever hacking enterprise cracks the system. AND THEY WILL.
https://www.investopedia.com/articles/investing/081415/understanding-how-federal-reserve-creates-money.asp
https://www.stlouisfed.org/open-vault/2017/november/does-federal-reserve-print-money
The Digital Dollar piece linked to above claims that "Transfer payments, such as those provided by governments to people during the Covid-19 crisis, would be made faster and easier if that money could be deposited directly into digital wallets."
"Digital" currency wouldn't have made them go any faster, because the payments were already made electronically at least to some recipients.
What we don't have (yet) are virtual wallets. So called "virtual wallets" now are just software layered upon existing payment systems.
A prepaid, rechargeable card comes close to a virtual wallet. Conceptually, it stores cash value on the card, like a physical wallet stores paper money. Potential loss is limited to the amount on the card, as is potential loss from having a "real" wallet stolen. They can be recharged with cash without using a bank. (I suspect the reality is that prepaid cards still rely on being connected to a server. That would mean less anonymity than advertised, and a greater possibility of failure as compared with pulling a dollar bill out of your wallet.)
In short, so long as "virtual" dollars are linked to "real" dollars, I don't see a big difference between them and the current, largely virtual system. There are significant concerns (notably in privacy and access) with a cashless society. But that's a different question, one that arises as virtual dollars supplant physical money.
A Center For Strategic and International Studies (CFSAIS) report indicates most of the worlds central banks have reached the experimental or pilot development phase of their examinations of CBDC use. The report indicates "The case for CBDC is based in large part on the underlying technology’s potential to improve payments efficiency and lower transaction costs, particularly for cross-border payments, as well as to bolster system integrity, spur financial innovation, and improve access to financial services."
The CFSAIS report also suggests that China's digital currency electronic payment (DCEP) program is significantly "motivated by concern that private digital payment platforms could displace traditional banks—posing a threat to financial stability and official sector oversight of economic and financial activity in China." Relatedly, a recent Asia Times article notes that "DCEP serves as a tool for the Chinese government to regain control over domestic financial crime, stabilize the financial system and protect China’s national security. Unlike many anonymous and decentralized cryptocurrencies, the DCEP is monitored and backed by the PBOC, affording China’s leadership supreme control over all transactions."
Proponents of a Fed based digital dollar think it would provide the unbanked with access to virtual dollars. However, a Bank Policy Institute (BPI) report suggests the banking community doubts the potential financial inclusion benefit would wind up being widespread. That report also suggests that fear of crytocurriences and stablecoins, widespread fear of China's DCEP advances, and European fear of US control over the global financial system are important motivators behind current central banker focus on CBDCs.
Just looking at the first part of the BPI report helps to explain some of my confusion. It notes that "digital money includes commercial bank money, central bank money, and any future CBDC [central bank digital currency]. Thus, while some describe a CBDC as moderniing from physical to digital money - in this country to a 'digital dollar' - a large and growing majority of transactions already are conducted with digital money. This also includes credit card transactions which are solely digital. Vault cash aside, every dollar on deposit at a U.S. bank is a 'digital dollar'."
As near as I can figure, CBDC is a form of digital currency where, instead of the digits representing a number of dollars the digits represent a number of "digital dollars". That's a currency that's one-to-one equivalent to, but distinct from, dollar currency (which is itself mostly digital now). A distinction largely without a difference.
For the opposite view, there's this 2017 undergrad Yale paper (TL; DR yet). It says that precisely because we've already got most money in digital form, introducing a CBDC ("Fedcoin") would address existing inefficiencies: "our digital money, locked up in private ledgers and exchanged through dozens of heterogenous databases en route from creditor to debtor, lacks the speed, stability, scalability, and security of a good cryptocurrency."
In order to make the system work, the BPI report says that each consumer would have to have an account, either with the central bank (direct model architecture) or at consumer bank (indirect model). While one can say that these are not traditional bank accounts, it befuddles me how one can say this system will serve "unbanked" people. By definition, wouldn't these people already be, or have to become, "banked"?
Likewise the Yale paper notes that "To spend or receive a Fedcoin, one must have an account with the Fed." (That would be the direct model architecture.) It goes on to say that "for the benefit of the underbanked, getting a Fed account should be easier than getting a bank account." Again, the only help being offered the "unbanked" is to force them into bank accounts.
As @davfor notes in his summary of the BPI report, it seems that the motivation for this parallel, pseudo dollar currency system is basically fear.
It appears we are presently living through the "fear of the unknown" stage in the CBDC development and implementation process. Central banks are varying in the speed with which they are acting. China wants to ensure top down control of its population and its financial system. And it is looking for ways to increase its acceptance as a global reserve currency. So, it is acting fast. The Fed appears to be taking a go slow approach so it can gather more information and access the varied aspects of the threat in some detail before it acts (or doesn't act).
https://joinbankon.org/
A new type of currency is not necessary to provide such accounts. Nor does this new currency seem to hold any intrinsic advantage for these customers over traditional (dollar-based) digital currency. Rather, it appears to be an example of a purported benefit promulgated as a rationale for CBDCs.
Per @msf : The Fed is reviewing this specific issue within the framework of deciding if creating CBDC technology will be useful as a way to address the topics highlighted in my excerpt from the CFSAIS report (as well as other topics not mentioned). Deciding the new technology will probably be useful would lower the threshold the Fed would face when considering whether to extend that technology to include an alternative type of personal bank account.
Presumably the Feds review is in detail examining the potential costs and benefits of creating various public sector alternate versions of a commercial bank account. Assuming empire building is not the overarching goal, the Fed will have not want to implement a public sector solution to a problem that is currently being adequately addressed by the banking community -- especially since doing so will most likely create new challenges the Fed will need to resolve regarding their relationships with that community.
Also, even if the Fed decides development and installation of CBDC technology is adviseable, it appears that additional authority will need to be provided by Congress (See Link 1, Link 2, and Link 3). In that case, another layer of review and agreement would be required before CBDC rollout. Presumably that additional review would include examining and agreeing to details of the Feds proposal.
Sure thing- good luck on that one. They don't even want to know what really happened on Jan 6.
The BPI discussion presents two principal points:
1. The Fed is authorized to issue only coin and currency (two different things) as they existed in 1913;
2. Even if the Fed could issue CBDC it might need additional Treasury approval.
As to whether additional Congressional authority would be needed, we can dismiss #2. Since the Treasury is part of the executive branch, not of the legislative branch, seeking its approval would not involve Congress.
Note that Powell (Link 1) said only the the Fed would not act without Congressional authorization, not that it could not. The former is a political statement, the latter a legal one. If by "need" additional Congressional authority you mean from a pragmatic perspective, I would tend to agree. Reading "need" as legally necessary, I'm not yet convinced.
BPI rationale #1 harkens back to 1913, when the Fed was tasked with "furnish[ing] an elastic currency". BPI goes on to observe that "Further, the statute provides that '[a]ny Federal Reserve bank may make application to the local Federal Reserve agent for such amount of the Federal Reserve notes herein before provided for as it may require,' which appears to suggest physical cash."
Fair enough. But is that a literal restriction, or rather simply descriptive of the technology of the time? In 1791, the 4th amendment protected you against illegal seizure of physical papers. It didn't protect you against wiretaps because they didn't exist and weren't conceived of at the time. It protects you now. Time marches on.
Rather than wonder about whether the Fed has the authority to issue digital currency to provide elasticity, we can go to the horse's mouth: https://www.cbsnews.com/news/full-transcript-fed-chair-jerome-powell-60-minutes-interview-economic-recovery-from-coronavirus-pandemic/
True he was talking about digitally "printing" dollars rather than printing "digital dollars". But since this argument for needing Congressional authorization is that the Fed can only print physical money, it doesn't seem to hold water.
Video (14 minutes): https://www.goldmansachs.com/insights/pages/whats-next-for-central-bank-digital-currencies.html
Transcript (7 pages): https://www.goldmansachs.com/insights/pages/the-daily-check-in/whats-next-for-central-bank-digital-currencies/transcript.pdf
I'm still left wondering, WHY?
Some relevant excerpts: About Fed Now (Federal Reserve website)
https://www.frbservices.org/financial-services/fednow/about.html
cryptocurrency: CBDC:
wealthtrack-weekly-investment-show-with-consuelo-mack
IMHO, the key distinction between cryptocurrencies and central bank digital encrypted currencies is that the latter are ultimately issued by central banks. That is, CBDCs are fiat currencies as opposed to something more akin to a commodity with a floating price, such as gold. While cryptocurrency prices fluctuate relative to the central bank dollar (as does, for that matter, the price of Swiss francs), neither fiat currencies nor cryptocurrencies have any intrinsic value. They are not attractive, they do not conduct electricity, they are not ductile, etc.
https://www.stlouisfed.org/open-vault/2018/april/three-ways-bitcoin-regular-currency
https://www.amnh.org/exhibitions/gold/incomparable-gold/gold-properties
Beyond that, it seems that all we're talking about are legal and technological distinctions that can be virtually eliminated with enough effort.
In that regard, it is worth noting that the market disagrees with the assertion that cryptocurrencies are beyond restriction. Else we wouldn't be seeing headlines like: Bitcoin falls 10% as China intensifies crypto crackdown.
Also on the subject of CDBC's, I ran across this 15 minute video clip yesterday. It includes comments made by the director of the Digital Currency Initiative at the MIT Media Lab.
A couple of excerpts from the short written description of the video: Warning. There is an ad at the beginning..... challenges to the U.S. dollar