A CBDC for the United States
Where does the effort stand, and what are the pros, cons, and impacts on your business?
On January 12, in an interview on CNBC’s Squawk Box, BlackRock chairman and CEO Larry Fink made a bold statement about the future of money in the United States: He predicted that the country will adopt a digital currency using blockchain technology. This comment reinforced his support for a federally backed central bank digital currency (CBDC), which he originally expressed in a 2022 letter to BlackRock shareholders.
Fink’s comment went largely unnoticed, as it was overshadowed by discussions of BlackRock’s $12.5 billion acquisition of Global Infrastructure Partners and the desirability of infrastructure investments. Still, it reflects growing acceptance of the idea of a digital dollar, despite slow progress and fierce resistance from sources including former President Trump, who has said a CBDC would give the federal government “absolute control over your money.”
CBDC critics’ concerns about privacy and security certainly need to be addressed in order to protect financial transactions from government surveillance. At the same time, many analysts warn that if the United States fails to create a state-issued digital fiat currency, it will undermine the status of the U.S. dollar as the world’s reserve currency and the nation’s role in global finance and trade.
Such a crisis would have profound impacts on import costs, foreign exchange (FX) rates, foreign direct investments, and every other aspect of the American economy. To prevent these consequences, supporters and opponents need to come together to create and recognize a digital dollar as legal tender.
The Digital Dollar Debate
The Federal Reserve and its branches have been researching various aspects of implementing a CBDC in the U.S. financial system since 2021. Wholesale, business-to-business use has been a major area of focus, with an eye toward interbank settlements among commercial banks, clearing institutions, or other entities that have access to central bank reserves. Some studies have addressed wholesale cross-border applications, retail use, system design, and cybersecurity issues related to the distributed ledger technology on which a CBDC platform would be built.
Yet the United States is lagging behind the rest of the developed world on CBDC adoption—in part because of U.S.-specific concerns around civil liberties and consumer protections, and in part because of the partisan divisions that have led to gridlock in Washington on many different issues.
CBDC proponents cite the need to maintain the U.S. dollar’s dominance and influence in the global financial system as a driving force for overcoming the obstacles to adoption. They assert that any threats to civil liberties could be mitigated with the right design, risk management, and governance choices. They also point to benefits such as streamlined financial transactions, fraud prevention, and financial inclusion.
A CBDC would enable organizations to transfer money in as little as three seconds, rather than the three days they currently wait for a wire transfer to settle. This acceleration in payments would provide particular benefits for international business operations, cross-border payments, and disaster relief. It’s also worth noting that encryption and authentication protocols make digital currencies fully traceable and more difficult to steal or counterfeit than physical currencies. And unbanked and financially disadvantaged people might be able to use a CBDC platform to send and receive money, build and store savings securely, and provide documentation of prudent financial behavior that could help them obtain credit and insurance coverage.
On the other side of the debate, the most vocal critics of the concept of a U.S. CBDC counter that a digital dollar is a textbook example of government overreach. In their view, CBDC adoption would give the government unprecedented visibility into users’ spending habits, including religious and political donations, as well as absolute control over monetary policy that would bypass the influence of commercial banks.
Other objections include arguments that a CBDC could destabilize the commercial banking system by reducing demand for bank deposits, thereby lowering banks’ profitability; that central storage of all financial information would mean a cyberattack could cripple the entire financial system; that the major challenge of unbanked and underbanked households is a lack of money, which wouldn’t be solved by a digital dollar; and—more recently—that the Federal Reserve’s new FedNow payment service, which enables financial institutions to send and receive payments in real time, eliminates the need for a wholesale CBDC.
These conflicting viewpoints have led to a standoff. In June 2022, Federal Reserve chair Jerome Powell said the Fed would not proceed without approval and direction from Congress. Since then, echoing Trump’s position that a digital dollar would jeopardize Americans’ financial privacy, both House Majority Whip Tom Emmer and Senator Ted Cruz have introduced “CBDC anti-surveillance” bills designed to prevent the Federal Reserve from issuing a government-controlled digital currency without congressional authorization.
The CBDC discussion is, therefore, likely to be on hold until after this year’s elections. But the stakes for the U.S. economy are too high to abandon the effort.
Threats to the Dollar’s Dominance
While CBDC adoption is effectively stalled in the United States, more than 130 other countries are in various stages of exploration or deployment. That includes three countries—the Bahamas, Jamaica, and Nigeria—that have fully implemented a state-backed digital fiat currency and 63 others that are in pilot or development stages.
The largest and best-known project is China’s digital yuan. That country’s e-CNY program has undergone extensive testing since 2019 and was introduced to the world at the Olympic Games in February 2022. It is currently being piloted with 260 million individual and corporate users in more than 200 use-case scenarios, including public transit, stimulus payments, and e-commerce.
In the European Union (EU), the European Central Bank is expected to begin piloting a digital euro this year. India’s retail CBDC pilot is active in more than 15 cities, with over a dozen banks participating. Brazil is piloting a digital real, with participants including Microsoft and Visa. Other late-stage initiatives include those in Australia, Thailand, and Russia, which have been testing various use cases. The Bank of England and Bank of Japan are also developing CBDC prototypes.
Experts believe that one of China’s goals in adopting a digital yuan is to challenge the dominance of the U.S. dollar in global finance. Most analysts dismiss any such effort as an exercise in futility, given the size and liquidity of U.S. debt markets and the flexibility of the dollar’s exchange rate. But there are other risks in the Fed’s failure to move forward on a digital dollar.
Chief among those risks is the emergence of interoperable cross-border digital currency initiatives that are being built without U.S. participation. Today, the U.S. dollar accounts for 85 percent of the $7.5 trillion in daily global FX trading turnover. Decreasing dependence on the dollar as an intermediary currency in executing exchanges between pairs of other currencies would not only reduce that percentage, but also weaken reliance on the U.S. dollar as the world’s reserve currency, as central banks would no longer need to hold dollars to cover FX trading.
The repercussions for the U.S. economy would be seismic. These changes would impact exchange rates, interest rates, government borrowing costs, the competitiveness of U.S. exports and imports, the profitability of the U.S. financial sector, and the United States’ geopolitical influence over other nations’ economic and political affairs, including sanctions enforcement.
Politics aside, it is inconceivable that lawmakers would sacrifice the health of the economy and the United States’ status as a global power by failing to participate in shaping digital currency policies, both here and abroad. From that perspective, adoption of a CBDC in the United States seems inevitable, and businesses should begin laying the groundwork for this shift in the financial landscape.
Preparing for a Digital Dollar
Regardless of the exact structure of a future U.S. CBDC, as well as the accompanying consumer protections and regulatory controls which would have to be hammered out by the Fed and lawmakers, businesses can anticipate the issues they would have to navigate to accommodate a new digital fiat currency. These include:
- Compliant money-transfer policies. Because a CBDC would run on distributed ledger technology, corporate financial risk managers would need to pay close attention to both risk mitigation and regulatory adherence, including anti-money laundering (AML) and Know Your Customer (KYC) measures.
- Digital payment acceptance. Corporate finance departments should prepare to use and accept digital dollars for both business-to-business and consumer payments, including cross-border payments from suppliers or customers located in countries that have their own CBDCs.
- Operational and strategic considerations. Companies accepting and paying in digital dollars would need a means of imposing guardrails against situations such as suppliers claiming they never received a payment sent over the blockchain.
- Cybersecurity. Doing business in digital dollars would make it more important than ever before for companies to maximize security protocols to prevent a security breach, including a ransomware attack that might threaten to release sensitive information, such as medical or financial records, unless payment was made in the CBDC.
- Regulatory compliance. Companies that are subject to industry-specific regulations around recordkeeping and reporting would need to take steps to document their digital dollar transactions in all the countries where they do business.
- Corporate governance. Corporate audit and risk management committees need to educate themselves about the business implications of CBDCs, including current regulatory requirements, and to implement enhanced oversight to ensure that they continue to be able to make informed decisions as CBDC-related issues arise.
Looking Ahead
Despite the fact that the development of a digital dollar is stuck in both regulatory and political limbo, the future of the United States’ influence on the global economy is intertwined with the fate of the U.S. CBDC initiative. A January analysis from the Atlantic Council was blunt.
“The thinking in Washington right now on payments innovation is to wait until after the November election. But the United States doesn’t have a year to waste. A year is an eternity in technology,” the report says. “The gap between the Fed and other major central banks is likely to widen through 2024, and the Fed will have to play catch-up. Between now and next January, Fed officials should do more to accelerate exploration efforts on all of their payment projects, including faster cross-border transfers and CBDCs. If they don’t, the future of money may quickly pass them by.”
In a country that has led the world financially—as well as in so many other areas—for many decades, that is unthinkable. The United States may have to play catch-up at this point, but there is no question that it needs to have a seat at the central bank digital currency table.
See also:
- China Is Leading the Digital Currency Race
- Biden Team Eyes Potential Threat from Digital Yuan
- Now’s the Time to Get Ready for FedNow
- Preparing for FedNow Instant Payments