US Takes ‘First Step’ CBDCs as e-CNY Rollout Nears
After months of delays for a plan of action as China forge ahead with its digital yuan (e-CNY) rollout, the US Federal Reserve has last week taken what could be described as “the first step in a public discussion” with stakeholders about central bank digital currencies (CBDCs).
The central bank released its review of the potential to issue a CBDC that “would represent a highly significant innovation in American money.” However, it did not advance or take a particular position on a digital dollar issuance.
Meant to highlight the potential benefits and risks of issuing a US CBDC, the paper describes the economic context for a CBDC as well as solicits feedback from interested parties. The paper’s release was expected earlier mentioned in May and then October 2021. Eventually, the U.S. Dollar in the Age of Digital Transformation review came out to represent what seems to be the Fed’s first major response to China’s e-CNY which is set to gain huge exposure with the Beijing Winter Olympic starting next week.
The e-CNY has been in the pilot phase for about two years. The Chinese CBDC has been identified as being at the forefront globally even though it is not the first to enter the market. Its main features, domestic and cross-border usage potentials have been demonstrated in several trials in recent times.
The e-CNY remains the first central bank-backed digital currency by a major economy despite suspicions that it is a tool that the Chinese government wants to use for data collection and monitoring citizens’ spendings. There are also speculations that its planned release and wider use could be a way for China to internationalise the yuan and challenge the dominance of the dollar.
However, over the period, the Fed had maintained that it is not in a race to issue a CBDC. At a September press conference, Fed Chairman Jerome Powell said that they would only consider issuing a CBDC if there were “clear and tangible benefits that outweigh any costs and risks.”
Whereas, arguments have been made for the US to need its own CBDC particularly to stay competitive and maintain the dollar’s dominant role in the world financial system.
As at last year, the PwC Global CBDC Index, which measures a central bank’s level of maturity in deploying their own CBDC, ranked the US at 18th as against China at third. The consulting firm also added that the issuance of a US CBDC is not likely to happen in 2022 because of the timing of a new US cryptography standard (quantum resistant) and the need to ensure high security to protect against attacks.
Meanwhile, last week’s 40‐page document discussion paper notes that a US CBDC, if one were created, would be privacy-protected, intermediated, widely transferable, and identity-verified. As the world awaits its decision on its CBDC plan, the Fed has asked the public to submit answers on 22 questions as a first step in the consultation process that cuts across various public forums. Most of the questions centre around the benefits of a CBDC, the associated risks, and policy considerations. The other area of interest is CBDC designs.