The Federal Reserve Takes Bold Step in Exploring Central Bank Digital Currencies

(TAMPA, Fla.) Sep 11, 2023 — The Federal Reserve, the central bank of the United States, is actively delving into the realm of Central Bank Digital Currencies (CBDCs) with an eye toward revolutionizing financial systems and improving accessibility to digital transactions. While proponents highlight the potential benefits of CBDCs, concerns regarding regulation, consumer protection, and the role of government have continued to emerge. Monica Eaton, founder and CEO of Chargebacks911, reviews the fundamentals and the current attitudes toward this theoretical paradigm shift in basic economics and commerce.

As a leader in fintech, Eaton is always looking toward future innovations in digital technology. However, she cautions, “With the lightning-fast pace of tech development and innovation, there needs to be an investment in infrastructure before its universal adoption. And, while digital currency has been around for over a decade, it is still in its beta-testing phase, especially when it comes to meeting consumer protection expectations.”

Understanding Central Banks and the Fed

Central banks play a vital role in a nation’s economy. They control the money supply and interest rates, oversee commercial banks, and act as lenders of last resort. Central banks serve as a safety net for financial institutions during crises. They also aim to keep inflation in check and maintain stable currency values. Central banks strive to foster economic growth and stability by implementing monetary policies. They are tasked with regulating the economy, managing setbacks, and ensuring the smooth functioning of financial systems. The Federal Reserve Act of 1913 established the Federal Reserve System as the central bank in the United States.1

What is a CBDC?

A central bank digital currency (CBDC) is a digital form of a country’s currency issued and backed by the central bank. CBDCs offer secure and convenient means of conducting transactions, potentially streamlining payment systems, increasing financial inclusion, and enhancing security measures. Unlike cryptocurrencies such as Bitcoin, however, CBDCs are backed by the credibility and trust of the central bank, serving as a modernized representation of money in the digital age. They are designed to work in conjunction with physical cash and traditional bank deposits, providing an additional form of secure and convenient digital payment.2

Reasons Why Central Banks Are Exploring CBDCs

A recent Bank for International Settlements (BIS) Monetary and Economic Department paper revealed that 90% of the 81 central banks surveyed were involved in CBDC-related initiatives. Among them, 26% were conducting CBDC pilots, and over 60% were engaged in experiments or proofs-of-concept related to digital currencies. This heightened interest in CBDCs, up from approximately 83% in 2020, may be attributed to the COVID-19 pandemic’s acceleration of digital solutions and the increased popularity of stablecoins and cryptocurrencies.3

Central bankers are interested in CBDCs for several reasons:

• Cash usage has declined, so central banks must reassess their role in the monetary system.
• Privately issued digital assets, like cryptocurrencies, are gaining popularity and continue to challenge fiat currency.
• Central banks want to be at the forefront of payment innovation and improve existing cash systems.
• They want more control over global payment systems by implementing CBDCs as the anchor for local digital payment systems.4

The Federal Reserve’s Perspective

The Federal Reserve has been engaging stakeholders in discussing the potential benefits and risks of a U.S. CBDC. The Fed acknowledges the emergence of new financial products and services, including digital wallets and cryptocurrencies, which have prompted global exploration of CBDCs. However, ensuring public confidence in the U.S. currency and payment systems is ultimately the bank’s paramount concern, meaning any move toward a CBDC must be carefully considered.

Key considerations for a U.S. CBDC include providing greater benefits than costs, complementing existing financial services, protecting privacy, combating criminal activity, and gaining broad stakeholder support. The Federal Reserve intends to seek diverse perspectives, develop international standards, and engage citizens through public comments, outreach, and forums. The government theorizes that a U.S. CBDC could offer convenience, added security, and increased liquidity while enabling faster payments, broadening access to financial services, and supporting further financial innovation.5

The Public’s Perspective

A recent poll by YouGov and the Cato Institute reveals that 34% of Americans oppose the implementation of a central bank digital currency, while only 16% are in favor. Concerns about government control, the elimination of cash, and cyberattacks significantly impact people’s perspectives on digital currency. Trust in the Federal Reserve and familiarity with CBDCs were strongly correlated with an individual’s support or opposition.

The survey found that twice as many Americans oppose a federally controlled digital currency as those who support it. However, 49% of respondents have not formed an opinion, likely due to limited knowledge about CBDCs.

Among those against a digital currency, the primary reasons include concerns about government surveillance and the risk of cyberattacks. A hefty 68% of Americans would oppose a CBDC if it meant the government could monitor their spending, and the same percentage would object if it led to the elimination of cash.6

Regulation and Writing Their Own Rules

As discussions on CBDCs continue, questions arise about the appropriate level of regulation. Proponents argue that robust regulation is necessary to ensure consumer protection, mitigate risks, and establish a fair and transparent framework. They contend that government oversight is critical to maintaining stability and preventing abuse in the rapidly evolving digital currency landscape.

Critics of CBDCs, however, express concerns about the government having too much control and potentially writing its own rules and currency in isolation. They argue that excessive regulation can stifle innovation from private entities, hindering progress and creating an anti-competitive environment.

Additionally, concerns surrounding financial privacy are top of mind for skeptics of CBDCs, including legislators, who say giving the government the ability to track and monitor all transactions could potentially limit financial freedom. Financial discrimination is also a concern, should governments cut off access based on a social credit system established by CBDCs. This could potentially destabilize financial institutions, according to some payments experts.7

Balancing Regulation and Innovation

The introduction of CBDCs has sparked heated debates among policymakers, economists, and the public. Advocates of more regulation argue that it is necessary to maintain a level playing field, protect consumers, and prevent illicit activities. Opponents caution against overregulation, which could impede innovation and hinder the development of emerging technologies and applications in the digital currency space.

Counterbalancing the benefits and risks of CBDCs will require global regulations to prevent abuses of power. Ongoing dialogue and consideration of diverse perspectives are crucial for the evolution and adoption of CBDCs.8

Cost Implications and the Government’s Role

Implementing CBDCs entails significant costs, including development, infrastructure, and ongoing operational expenses. According to the Congressional Research Service report, Congress must weigh the benefits, costs, and uncertainties of a digital dollar. Additionally, they must determine how to defray the cost of developing a new digital currency.9

“While the government has a critical role in ensuring the stability and integrity of the financial system, collaboration with private sector entities and leveraging domain experts is crucial to foster innovation and create efficient payment solutions,” Eaton notes. “Striking a balance between regulation, innovation, and consumer protection is a complex task that requires careful consideration and stakeholder engagement. Finding this equilibrium will be essential for the successful adoption and implementation of CBDCs to positively impact the economy, promote financial inclusion, and benefit individuals and businesses.”

About Monica Eaton

As an acclaimed entrepreneur, speaker, and author, Monica Eaton is widely recognized as a thought leader in the FinTech industry and a champion of women in technology. She established her entrepreneurial credentials upon selling her first business at the age of 19. When a subsequent eCommerce venture was plagued by revenue-leeching chargebacks and fraud, Eaton rose to the challenge by developing a robust solution that combined human insight and agile technology. Today, her innovations are used by thousands of companies worldwide, cementing her reputation as one of the payment industry’s foremost experts in risk management, chargeback mitigation, and fraud prevention. Monica Eaton is honored to be the recipient of various industry awards. Her own expertise, as well as the services provided by her companies, has been recognized as outstanding by her peers and other industry leaders. Visit www.monicaec.com.

References

1. Segal, T. (2023, January 20). What is a central bank, and does the U.S. have one?. Investopedia. investopedia.com/terms/c/centralbank.asp
2. McKinsey & Company. (2023, March 1). What is Central Bank Digital Currency (CBDC)?. McKinsey & Company. mckinsey.com/featured-insights/mckinsey-explainers/what-is-central-bank-digital-currency-cbdc
3. Wright, T. (2022, May 6). 90% of surveyed central banks are exploring cbdcs – bis. Cointelegraph. cointelegraph.com/news/90-of-surveyed-central-banks-are-exploring-cbdcs-bis
4. Denecker, O., d’Estienne, A., Gompertz, P.-M., & Sasia, E. (2022, October 13). Central Bank Digital Currencies: An active role for commercial banks. McKinsey & Company. mckinsey.com/industries/financial-services/our-insights/central-bank-digital-currencies-an-active-role-for-commercial-banks
5. Dollar in the age of digital – Federal Reserve Board. (n.d.-b). federalreserve.gov/publications/files/money-and-payments-20220120.pdf
6. Insights, L. (2023, June 6). Most Americans still skeptical about CBDC, says Cato/Yougov Survey. Ledger Insights – blockchain for enterprise. ledgerinsights.com/cbdc-survey-americans-skeptical-digital-dollar/
7. CBDCs are a very bad idea. HackerNoon. (n.d.). hackernoon.com/cbdcs-are-a-very-bad-idea
8. Cryptolytx. (2023, June 6). The polarising debate of Central Bank Digital Currencies (cbdcs). Medium. medium.com/@cryptolytx/the-polarising-debate-of-central-bank-digital-currencies-cbdcs-9f158b5fb6af
9. Central Bank Digital Currencies: Policy issues – CRS reports. (n.d.-a). crsreports.congress.gov/product/pdf/R/R46850

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