Central Bank Digital Currency: Assessing the Risks and Dispelling the Myths (2024)

FAQs

Central Bank Digital Currency: Assessing the Risks and Dispelling the Myths? ›

While CBDCs don't offer any unique benefits to the American people, they do pose serious risks to financial privacy and economic freedom. From expanding financial surveillance to destabilizing the financial system, CBDCs could impose enormous costs on U.S. citizens.

A UK House of Lords economic affairs committee report concluded that a CBDC poses two main security risks: first, that individual accounts could be compromised through cybersecurity weaknesses; and, second, that a centralised CBDC ledger could be a target for attack from “hostile state and non-state actors”.

U.S. President Joe Biden ordered officials to look into a digital dollar in 2022 but it has become a divisive political issue with Biden's Republican rival in this year's U.S. election race, Donald Trump, vowing not to allow it.

But a CBDC is always a liability of the Federal Reserve, America's central bank (that's where the CB comes from). That means the Fed has the responsibility to do with it what ever is required. In other words, whenever you use a dollar of CBDC, there's a direct connection between you and the Fed. Not a good idea.

1. The main purpose of CBDCs is to provide businesses and consumers conducting financial transactions with privacy, transferability, convenience, accessibility, and financial security. 3. CBDCs would also reduce the risks associated with using digital currencies, or cryptocurrencies, in their current form.

Will a U.S. CBDC replace cash or paper currency? The Federal Reserve is committed to ensuring the continued safety and availability of cash and is considering a CBDC as a means to expand safe payment options, not to reduce or replace them.

Some positive attributes, such as lower fees and less friction in the system, are commonly cited as reasons to promote this project. However, reduced privacy and greater government oversight of one's financial life are common downsides many consider.

But that begs a critical question: What would replace the dollar? Some say it will be the euro; others, perhaps the Japanese yen or China's renminbi. And some call for a new world reserve currency, possibly based on the IMF's Special Drawing Right or SDR, a reserve asset.

Here in the U.S., if the Fed issued a digital dollar, that digital dollar would be substantially identical to the cash dollar and could be exchanged as such. The exchange rate would be constant, as they would be the same thing created by the same governmental mechanism.

What is the dark side of CBDC? ›

A central bank digital currency, or CBDC, is a digital national currency. Like paper dollars, a CBDC would be a liability of the Federal Reserve. Unlike paper dollars, it would offer neither the privacy protections nor the finality that cash provides.

Results: The impact of a CBDC is much lower after taking into account that households enjoy the complementarity between deposits and other financial products within the same bank, which gives banks a competitive advantage over the CBDC.

Retail CBDCs can be distributed through various models. In the intermediated model, the central bank issues the CBDC and manages core infrastructures, while financial intermediaries offer customer services. The ECB and the Federal Reserve have proposed intermediated CBDCs.

If it's been a long time since you pulled out actual dollars and coins to pay for something — here's a conversation for you. It might seem like cash is slowly becoming obsolete. But, Brett Scott says it's a false narrative that we're all pining for a cashless society.

1 The United States doesn't yet have a CBDC as of 2024 but it's important to understand the concept with this option under discussion, as well as the benefits and risks attached and steps toward implementation.

China's Central Bank Digital Currency (CBDC), the eCNY, is already involved in experiments with other central banks aiming to trade directly with each other's currencies instead of going through the US dollar. That in turn could reduce the potential reach of US sanctions and blunt Washington's financial power.

But it is unlikely that there will be any major shift soon. The US economy is not only the largest economy in the world but is also diversified, dynamic, innovative and relatively flexible. While its share of global GDP has fallen, this is due to rising shares of emerging markets.

As people move toward more electronic or digital forms of payment, it might seem like paper money is on its way toward obsolescence. But experts say that cash will always be around.

Participating banks include BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, TD Bank, Truist, U.S. Bank and Wells Fargo.

The Bahamas, Jamaica, and Nigeria have already introduced CBDCs. And more than 100 countries are in the exploration stage. Central bankers in Brazil, China, the euro area, India, and the United Kingdom are at the forefront.