In January, the US Federal Reserve released a discussion paper on a potential digital currency for the US Federal Reserve (CBDC) entitled “Money and Payments: The US Dollar in the Age of Digital Transformation. The paper’s comment period ended on May 20, with the Fed receiving over 2,000 pages of comments from individuals as well as responses from key stakeholders.
Cointelegraph read a selection of shareholders’ responses to the Fed, and it soon became clear that there were plenty of confident opinions but little agreement among them. The main points of a common nature are in the places where they are all at a loss.
The Central Bank wants to know
Appropriate for its purpose, the Fed provides a broad overview of central bank digital currencies and CBDC-related material without much depth. The discussion begins with the results of previous analyzes that determined that the US CBDC would be most successful if it is privacy, mediated, widely transferable and authenticated. It continues to consider the potential uses, benefits and risks of the US CBDC. Stablecoins and cryptocurrency are mentioned briefly and 22 questions are offered for discussion.
The paper is also examining the development of electronic money at the moment. On the wholesale side, the FedNow service is expected to make real-time, round-the-clock interbank payments to begin in 2023. At the same time, the private bank is seeking and other plans to increase financial participation by promoting low-cost and under-served banking services.
Shadows of neutrality
One thing that is lacking in the comments of stakeholders that Cointelegraph examined is neutrality. The International Monetary Fund’s response is one of the exceptions in this regard.
IIF is an international financial industry association with more than 450 members from over 70 countries. Members of it are commercial banks and investment banks, asset managers, insurance companies, state-owned funds, hedge funds, central banks and development banks.
The IIF answered all 22 questions posed by the central bank while remaining agnostic about the benefits of establishing a US CBDC.
“A decision like this needs serious consideration, so the IIF would be quite constructive in its submission to support the Fed’s ability to assess the pros and cons,” Jessica Renier, IIF’s Chief Financial Officer, told Cointelegraph.
Answer IIF is not without its implications. It lists 12 policy perspectives that the authors believe need to be addressed before the CBDC can be launched, including environmental issues that the Fed has not mentioned. It offers practical recommendations for certifiers and other technical issues and emphasizes the need for private sector input for the retail CBDC.
“The business model needs to work,” said Renier. “If the risk outweighs the incentive, you could only attract intermediaries who depend on the sale of user data, such as technology companies. It’s not good for consumers. “She added:
“If the central bank continues, it will need to work closely with the banks to understand the real impact on their ability to lend and test the actual operations of a potential CBDC.
The Association of Securities Industries and Financial Markets is a representative of stockbrokers, investment banks and asset managers, who fight for active, resilient capital markets.
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Its long and detailed answer does not address the desirability of implementing the CBDC, but focuses on settlements and payments between financial institutions, noting that “US capital markets finance 73 percent of all economic activity, in terms of equity and debt financing. companies. ”
Programmability and interoperability are key for SIFMA, stating that “Many benefits […] often associated with wCBDCs [wholesale CBDCs] are not dependent on wCBDCs; they could be developed using other payment structures such as stablecoins or settlement tokens using DLT infrastructure.
“Let me do it”
Some commenters expressed their views more clearly. The National Association of Credit Unions responded to the Fed with a letter. CUNA has taken a stand against the US CBDC elsewhere, and although its wording is diplomatic in its response, its doubts are clear. “Given that the vast majority of US payments are already made through digital channels, the central bank must make clear what problems it is trying to solve,” the letter said.
In fact, the CBDC represents potential competition with credit unions for deposits. “If credit unions lose access to significant deposits and have to invest significant funding in new technology and the development of the CBDC wallet, the benefits they can bring to their members will inevitably be felt.
The establishment of the CBDC would inevitably lead to the transfer of funds from banks to the Fed, says the US Banking Association in its comments, which estimates that 71% of bank funding could be at risk of transfer. Furthermore:
“The introduction of the CBDC would risk undermining the important role that banks play in financial intermediation.
This is just the beginning of a litany of possible misfortunes. The CBDC would exacerbate the stressful event and likely impede the transmission of monetary policy, the ABA said in a statement. “Once we have assessed the likely impact of the CBDC issue, it has become clear that the alleged benefits of the CBDC are uncertain and unlikely to materialize, while the costs are real and acute,” the ABA concludes. It goes on to suggest that stablecoins are a better option.
The Banking Policy Institute said in the same way: “To the extent that the CBDC could produce one or more benefits, it would probably be possible to achieve those benefits in a less harmful way.
Circle Internet Financial, the issuer of USD Coin (USDC) stablecoin, also claims the superiority of stablecoins over CBDCs in its response to the Fed, not surprisingly.
“Many companies, including Circle, have taken advantage of blockchain technology to support billions of dollars in economic activity with fiat-linked stablecoins,” the response said. “The introduction of the CBDC by the Central Bank of Iceland could have a cooling effect on new innovations that could otherwise make the US economy and the financial sector more competitive both domestically and abroad.
Hringur participated in selected questions posed by the Fed and focused on comparing CBDCs and stablecoins.
At the other end of the spectrum, there is a lot of enthusiasm for the US CBDC’s response in the blockchain company nChain, which the company provided to Cointelegraph. The authors write:
“While some of the potential benefits to the CBDC may come from the private sector (albeit with credit and liquidity risk), there are social, rapid and regional political benefits to fair government involvement.”
London-based nChain sees the benefits of disconnecting much of the digital payment system from the “more fragile credit and banking system” and sees the CBDC as an opportunity to free consumers from “free” financial services that actually have “pay by privacy” business model. Furthermore, nChain is convinced that the US CBDC could improve financial participation. “If you would like to discuss further, please contact us and we would be honored to provide further assistance,” the authors write.
Privacy concerns run deep
A few points stand out as sore points in the answers. Many question the ability of the US CBDC to increase financial participation and point out that many of those without a bank are non-bankers of their choice. Uncertainty is particularly addressed by questions of interest payments by the US CBDC and restrictions on the amount that can be held, both of which are possible monetary policy instruments. nChain is an exception to this rule, and argues against both on the grounds that physical money is not subject to these restrictions.
However, privacy stands out as the most important concern. Privacy issues are repeatedly mentioned in the responses and even received responses from specialized agencies.
The Electronic Privacy Center is a public interest research center in Washington, DC that focuses on privacy, including consumer privacy. EPIC is agnostic in issuing the CBDC, but recommends in its response that if it does, the Fed should adopt a digital currency based on non-distributed ledger technology and its permanent listing. It argues that the Fed’s intermediate label could be designed to protect privacy while still allowing money laundering and terrorist financing to be monitored.
“Today’s digital payment space is a nightmare about privacy,” EPIC lawyer Jake Wiener, co-author of the centre’s comments, told Cointelegraph. “The CBDC will only improve privacy if it is paired with strong rules to ensure that the current payment services industry is not copied through a practical digital wallet and point-of-sale system. Technology alone is not enough. “
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In its letter, the center says there are several other benefits of the symbol. It could be integrated into the current banking system, with improved consumer privacy and at a lower cost than DLT would provide. The Hamilton Project, a CBDC research project conducted by the Central Bank of Boston and the Massachusetts Institute of Technology’s Digital Currency Initiative, also found a non-blockchain model that it tested was preferable to DLT due to much faster processing times.
EPIC’s comments make extensive reference to the ideas of the founder of XX Network, David Chaum. Chaum himself told the Cointelegraph, “Privacy needs to be built into CBDCs, and that only applies if it can not be removed secretly. Of course, there are other important considerations: to prevent large-scale crime, provide non-bankers and protect against counterfeiting. But without built-in privacy, CBDCs will not drive economic growth like real e-cash can. “
According to the American Civil Liberties Union and 11 other NGOs that issued short letters, “Anonymity should be paramount in the pursuit of a fairer and more secure financial system.”
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