The development of central bank digital currencies (CBDC) has accelerated in 2022 and is heading into 2023. Critics are worried, however, that the increasing adoption of CBDCs might trigger liberty and privacy concerns, as there’s no limit to the extent of control the government could have over its citizens. Despite these concerns, central banks intend to digitize their currencies within the next decade.
The Federal Reserve Bank of New York recently launched a 12-week pilot program with nine major financial institutions, including Citigroup, Mastercard, and Wells Fargo, to experiment with a CBDC and a proof-of-concept digital money platform called the Regulated Liability Network.
The project aims to determine how banks use digital currencies in a public ledger and if this system would speed up payments.
Although the New York Fed noted that it wouldn’t use the results to form policy or decide about establishing a CBDC, the central bank has come under pressure from Washington to keep up with nations that have digitized their currencies, particularly China.
The White House claimed a CBDC “has the potential to offer significant benefits.”
In September, Secretary of the Treasury Janet Yellen endorsed national efforts to “advance policy and technical work” on a CBDC since “some aspects of our current payment system are too slow or too expensive.”
This past summer, Rep. Jim Himes (D-Conn.) submitted a proposal for the issuance of a CBDC by the Federal Reserve, arguing that it would help ensure that the U.S. dollar maintains its global reserve currency status.
“Over the last few years, we have seen other governments make real progress in establishing a central bank digital currency,” Himes said in a statement. “The longer the United States government waits to embrace this innovation, the further we fall behind both foreign governments and the private sector.”
A growing number of Fed officials agree that the United States needs to start exploring the adoption of a virtual currency.
Federal Reserve Board Governor Lael Brainard testifies before a Senate Banking Committee hearing on her nomination to be vice chair of the Federal Reserve, on Capitol Hill in Washington, on Jan. 13, 2022. Elizabeth Frantz/Reuters
Fed Vice Chair Lael Brainard told the House Financial Services Committee in May that digitizing the dollar could maintain stability in the financial system. “We recognize there are risks of not acting, just as there are risks of acting,” she said.
The World Is Bullish on CBDCs
The Atlantic Council, a nonprofit think tank that focuses on international affairs, reported that more than 100 nations, representing 95 percent of global GDP, are exploring or have implemented CBDCs, with the United States and the United Kingdom far behind their counterparts.
A December “Future of Payments” report by the Official Monetary and Financial Institutions Forum found that two-thirds of surveyed central banks plan to issue a CBDC within 10 years.
“Overall, if central banks decide to issue a CBDC, they expect deployment to come sooner rather than later,” the report stated.
Across the globe, countries have unveiled plans to develop a CBDC.
The European Commission, for example, confirmed earlier this year that it’s working on a digital euro, with the chief objective being a single currency complementing euro banknotes and coins. It’s consulting with financial services experts, chambers of commerce, and the general public to assess the impact of implementation.
Tiff Macklem, the head of the Bank of Canada, plans to launch a consultation with Canadians to learn “what are Canadians’ interests in a digital currency, what are their expectations, what sort of elements would be important to them.”
Indonesia announced “Project Garuda” in a white paper on Nov. 30, revealing that it will produce a digital rupiah in three stages.
After five years of exploring the creation of a digital currency, Hong Kong is poised to issue an electronic version of the Hong Kong dollar (e-HKD) soon.
Roberto Campos Neto, president of Brazil’s central bank, confirmed at a press conference that the institution intends to release a CBDC in 2024. Neto thinks that a digital currency issued by the Brazilian central bank would benefit the economy and fuel participation.
“I think that this digitized, paid-in, integrated system, with inclusion, will help a lot in the development and inclusion of people in the financial world,” he said.
But these countries have much catching up to do, considering that China has enjoyed a head start with its digital yuan. This could allow Beijing to advance its long-term aim of advancing yuan internationalization and growing its share of global payments currency.
Is this the beginning of the end of physical money?
Andrew Moran
Author
Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."
