US central bank digital currency commentators divided on profits, unified in confusion
In January, the United States Federal Reserve Board of Governors released a discussion paper on a potential US central bank digital currency (CBDC), titled “Money and Payments: The US Dollar in the Age of Digital Transformation.” The comment period for the paper ended on May 20, with the Fed receiving more than 2,000 pages of comments from individuals, along with responses from key stakeholders.
Cointelegraph read a selection of shareholder reactions to the Fed paper, and it quickly became clear that there are plenty of confidently expressed opinions but little consensus among them. The main points of similarity are in the places where they are all confused.
Fed wants to know
Appropriately for its purpose, Fed Paper provides a comprehensive overview of central bank digital currencies and CBDC-adjacent topics without much depth. The discussion begins with the results of previous analyzes that determined that a US CBDC will have the best results if it is privacy-protected, intermediary, widely transferable and identity-verified. It considers the potential uses, benefits and risks of US CBDCs. Stablecoins and cryptocurrencies are briefly mentioned, and 22 questions are offered for discussion.
The paper also looks at current developments in electronic money. On the wholesale side, the FedNow service is expected to enable real-time, round-the-clock interbank payments starting in 2023. Meanwhile, private bank initiatives and other programs seek to increase financial inclusion by promoting low-cost banking services. who are unbanked and out of service.
colors of neutrality
One thing that has been examined in short supply in stakeholder comments is Cointelegraph examining neutrality. The response of the International Finance Institute is an exception in this regard.
IIF is a global financial industry association with over 450 members from over 70 countries. Its membership includes commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks and development banks.
The IIF answered all 22 questions suggested by the Fed, while remaining agnostic on the merits of creating a US CBDC.
Jessica Rainier, IIF’s managing director of digital finance, told Cointelegraph: “A decision like this deserves serious consideration, so IIF wanted to be creative enough in its submission to support the Fed’s ability to evaluate pros and cons. “
IIF’s response is not undeniable. It lists 12 policy considerations the authors think need to be addressed before a CBDC is launched, including environmental issues that have not been mentioned by the Fed. It provides practical suggestions on validators and other technical issues and attempts to emphasize the need for input from the private sector for retail CBDCs.
“The business model needs to work,” Rainier said. “If the risk outweighs the incentive, you can only attract middlemen who rely on selling user data, like tech firms. That is not good for consumers.” He added:
“If the Fed moves forward, it needs to work closely with banks to understand the real impact on their ability to lend and test the actual operation of a potential CBDC.”
The Securities Industry and Financial Markets Association represents securities broker-dealers, investment banks and asset managers who advocate for effective, resilient capital markets.
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Its lengthy, detailed response does not take a position on the desirability of introducing a CBDC, but focuses on settlement and payments between financial institutions, noting that “in the case of equity and debt financing of US capital markets non-financial Funds 73 percent of all economic activity in the corporation.”
Programmability and interoperability are major concerns for SIFMA, which states that it has “multiple benefits”. […] Frequently associated with WCBDC [wholesale CBDCs] are not dependent on WCBDC; They can be developed using other payment infrastructure such as stablecoins or settlement tokens using DLT infrastructure.”
“let me do it”
Some commentators stated their position more clearly. The National Association of Credit Unions responded with a letter to the Fed paper. CUNA has taken a stance against US CBDCs elsewhere, and while its response has been diplomatic, its skepticism is clear. “Given that most US payments are already being made through digital channels, the Fed should clearly state what problem(s) it is trying to solve,” the letter said. ”
At most, CBDCs represent potential competition with credit unions for deposits. “If credit unions lose access to sufficient deposits and must invest significant funds in the development of new technology and CBDC wallets, the benefits they are able to provide to their members will inevitably be affected.”
The creation of a CBDC would essentially lead to the movement of funds from banks to the Fed, the American Banking Association said in its comments, estimating that 71% of bank funding could be at risk of being transferred. ahead:
“The introduction of a CBDC would take the risk of undermining the important role of banks in financial intermediation.”
This is just the beginning of a litany of potential misfortunes. The ABA commentary said that CBDCs would exacerbate a tense event and could hinder the transmission of monetary policy. “As we evaluate the potential impact of issuing a CBDC, it has become clear that the perceived benefits of a CBDC are uncertain and unlikely to be realized, while the costs are real and acute,” concluded the ABA. This suggests that stablecoins would be a better option.
The Banking Policy Institute made a similar comment: “To the extent that a CBDC can generate one or more benefits, those benefits can be achieved through less harmful means.”
Circle Internet Financial, the issuer of the USD Coin (USDC) stablecoin, surprisingly argues for the superiority of stablecoins over CBDCs, in response to the Fed paper.
Mariner S in Washington DC. Eccles Federal Reserve Board Building Source: Agnostic Campaigner Kidd.
“Many companies, including Circle, have leveraged blockchain technology to support fiat-referenced stablecoins to support trillions of dollars in economic activity,” the response said. “The introduction of a CBDC by the Federal Reserve could have a cooling effect on new innovations that could otherwise make the US economy and financial sector more competitive both domestically and abroad.”
Focusing on comparing CBDCs and stablecoins, Circle linked to select questions suggested by the Fed.
On the other end of the spectrum, there is enough enthusiasm for a US CBDC in response to enterprise blockchain company nChain, which the company provided to Cointelegraph. The author writes:
“While some of the potential benefits CBDCs can provide to the private sector (albeit with debt and liquidity risks), there are social, momentum and geopolitical benefits to proper government partnerships.”
London-based nChain sees benefits in separating large parts of the digital payment system from the “more fragile credit and banking system” and sees CBDCs as an opportunity to free consumers from “free” financial services, which are in fact ” Pay with Pay” facility. Privacy” business model. Furthermore, nChain is confident that US CBDCs can improve financial inclusion. “If you would like to discuss further, please contact us and we will be honored to provide further assistance,” the authors write.
Privacy concerns run deep
Some issues stand out as sore points during the responses. Many are skeptical of the ability of US CBDCs to expand financial inclusion, noting that many of those who do not have banks are unbanked by choice. Questions about paying interest and imposing limits on the amount that can be held on US CBDCs, both of which are potential instruments of monetary policy, are treated with particular uncertainty. nChain is an exception to this generality, arguing against both on the grounds that physical money is not subject to those restrictions.
However, privacy emerges as the most important concern. Privacy issues are repeatedly mentioned in the responses and even responses from particular organizations have been received.
The Electronic Privacy Information Center is a public interest research center in Washington, DC that focuses on privacy, including consumer privacy. The EPIC is agnostic on CBDC issuance, but recommends in its response that if this happens, the Fed should adopt a token-based digital currency that does not rely on distributed ledger technology and its permanent recordkeeping. It argues that Fed-issued intermediate tokens may be designed to protect privacy while still allowing for anti-money laundering and counter-terrorist financing controls.
“The digital payments space today is a privacy nightmare,” EPIC Law fellow Jake Weiner, a co-author of the Center’s comments, told Cointelegraph. “CBDCs will only improve privacy if combined with stronger regulations to ensure that the current payment services industry is not duplicated through exploitative digital wallets and point-of-sale systems. Technology alone is not enough.”
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The Center has said in its letter that the token has many other benefits. It can be incorporated into the current banking system with better consumer privacy and can be provided at a lower cost than DLT. The Hamilton Project, a CBDC research project run by the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology’s Digital Currency Initiative, has also found a non-blockchain model, which is considered preferable to DLT due to its much faster processing time.
EPIC’s comments widely cite the views of XX Network founder David Chaum. Chaum himself told Cointelegraph, “There is a need to build secrecy in CBDCs, and this only matters if it cannot be removed in secret. Of course, there are other key considerations: preventing large-scale criminal use, unbanked.” Giving people the right to vote and protecting against fraud. But without built-in privacy, a CBDC will not drive economic growth the way real electronic cash can.”
According to the American Civil Liberties Union and 11 other non-governmental organizations, which issued a short letter, “anonymity should be a paramount consideration in the pursuit of a more just and secure financial system.”
