America’s Unique Journey to Central Bank Digital Currency

Wednesday, October 12, 2022 | By The SS&C Learning Institute

America’s Unique Journey to Central Bank Digital Currency

Economies throughout the world are pursuing the idea of a digital currency issued by central banks, with more than 80 countries acknowledging they are currently investigating the implementation of a central bank digital currency (CBDC). The U.S. recently announced they’ve also begun exploring a CBDC, although our journey will not follow exactly the same path. Going forward, much attention will be turned to the Federal Reserve; in mid-September 2022, the Treasury Department released a framework for regulating digital assets. According to Treasury Secretary Janet Yellen, one major objective is to “advance policy and technical work on a potential central bank digital currency, or CBDC."

The Treasury Department will need to address numerous challenges in the move toward CBDC. One primary question is how the traditional banking industry will respond to this change. The notion of a CBDC would essentially mean that every individual has their own account at the Federal Reserve, bypassing our traditional and existing banking structure. Disclosure provisions, issues of reportability, regulatory oversight and transparency are all topics that need to be addressed as we explore developing such a payment system.

Fortunately, we can benefit from lessons learned from other countries starting to implement CBDC. Nigeria, the Bahamas and China have already issued various types of CBDC, which can serve as a living laboratory for us to follow and analyze. These initiatives are of a retail structure, available for individuals and consumers to use, and/or wholesale—a structure specifically for banks and institutions to settle transactions and conduct business.

Distributed Ledger Technology (DLT), the operational platform that makes this concept viable, will undoubtedly continue to evolve as well, expanding or redefining system capabilities as we move forward.

It is also worthwhile to note a paradox. Many participants in the traditional crypto market see the negatives in lack of transparency, the potential for fraud and security concerns inherent in digital assets; conversely, CBDC actually increases the transparency of most banking functions, and being hosted by a central authority or government potentially increases oversight. It’s obvious that other countries see opportunities with this evolution. However, given that Americans are accustomed to more independence, privacy and choice, we have a unique set of obstacles in getting buy-in from the general population.

With the Biden Administration having just laid out a game plan for the exploration and development of a CBDC in September[i], and Chairman Jerome Powell and the Federal Reserve also weighing in[ii], no doubt there is much more to follow. How quickly remains a question.

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