Crypto’s Pain Is CBDC and Digital Dollar’s 2022 Gain

One surprising digital dollar asset had a great 2022, and it wasn’t cryptocurrency.

While the past year saw the value of the crypto market shrink to $1.4 trillion from its 2021 high of $3 trillion, governments around the world increasingly experimented with a different form of digital money — a national legal tender.

Perhaps fearing that the future of money might pass them by, the central banks of 114 countries have this past year been undertaking a variety of investigative programs researching, and even acting out, the feasibility of issuing sovereign, virtual currencies backed by a federal banking system.

As of December 2022, all G7 economies have now moved into the development stage of a central bank digital currency (CBDC).

Money Isn’t Paper Anymore

A CBDC is electronic, rather than physical, money backed and issued by a sovereign nation.

Compared to cryptocurrency tokens, which are stored-value digital assets, CBDCs act as true legal tender.

As reported by PYMNTS, a recent multi-year project from the Federal Reserve Bank of Boston and the Digital Currency Initiative at the Massachusetts Institute of Technology (MIT) has proven the technical feasibility of a U.S. CBDC.

Further findings from the project will be released at the start of 2023.

Separately, the New York Federal Reserve is conducting a “watershed” digital currency project with a consortium of leading commercial financial institutions, including BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, Truist, U.S. Bank, TD Bank and Wells Fargo.

“We strongly concur with the Federal Reserve’s view that — provided the creation of a CBDC is determined to be warranted — an intermediated (two-tier) distribution model is preferable for the needs of the U.S. economy, as it preserves the role of financial intermediaries and payment service providers, while utilizing existing resources,” Mastercard, a participant in the New York project, said in a public statement.

Digitally holding and transferring money is nothing new for consumers or businesses, both of whom have relied on bank accounts, online transactions, and payment apps for years.

However, the forms of money used in those digital transactions are generally the liabilities of commercial banks and other private entities.

A CBDC issued digital dollar would instead be a liability of the Federal Reserve, just as paper currency is.

The benefits offered by a CBDC include hyper-rapid settlement speed and a far greater transaction volume processing compared to most of the options available today, including settlements across both bitcoin and ethereum blockchains.

The Boston Fed’s research established a technical baseline for CBDC transactions of between 170,000 and 1.7 million transactions per second. The project was able to bring nearly all transactions (99%) successfully to completion in under five seconds.

Observers of the trial said this highly efficient “real-time” settlement speed could revolutionize both money and payments.

Personal Freedom and Economic Liberty

In March 2022, President Joe Biden signed an executive order that called for American leadership in exploring CBDC possibilities.

Despite this presidential show of support, the Federal Reserve’s CBDC initiatives are running into controversy on Capitol Hill.

Whereas bitcoin, the best known and most widely held cryptocurrency, is a politically neutral monetary system whose decentralized, peer-to-peer nature prohibits identity tracking and collects no personal information, CBDCs on the other hand are viewed by some as representing the opposite of crypto’s “freedoms” due to their implicit governmental ties.

This has led to growing fears among some observers that the Federal Reserve could use CBDCs to collect personal information on citizens, and in turn leverage those digital dollar transactions as a surveillance tool to track certain individuals or subsets of the population, even going so far as to freeze accounts or disallow for certain purchases.

As a result of these concerns, Minnesota Congressman Tom Emmer, the ranking Republican on the House Financial Services Subcommittee on Oversight and Investigations, introduced a bill prohibiting the Federal Reserve from issuing a CBDC directly to individuals.

The proposed legislation was read twice and referred to the Committee on Banking, Housing, and Urban Affairs, where it awaits further action.

Emmer has not replied to a request by PYMNTS for comment.

What’s Next?

At a time when a cocoa farmer in Central America can digitally communicate in real time with wholesale and retail customers around the world, it may seem archaic to keep moving money through systems and infrastructure designed for the paper money era.

Eleven countries have already launched their own digital currencies into circulation, including the Bahamas, Jamaica and Nigeria.

The U.S. Fed’s feasibility projects, both those completed and still in-progress, have indicated, using clear language, that they are “policy agnostic” and meant just to explore any potential benefits and risks of CBDCS, not to influence legislation.

In a comment to PYMNTS earlier this month, a Boston Fed spokesperson underscored that their work researching CBDCs was “purely academic.”

The Federal Reserve has made no decision on whether to pursue, much less implement, a CBDC and it remains to be seen whether that stoic stance will change in 2023.

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