Digital dollar?

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The crypto world has taken a beating since the FTX disaster, which reverberated through the entire system in recent months, and this week witnessed a solvency crisis at crypto-focused bank Silvergate Capital (SI). However, Bitcoin (BTC-USD) (+34% YTD), Ethereum (ETH-USD) (+29% YTD) and other tokens have managed to shake off the headlines, and talk of a more centralized industry is heating up again. In fact, Nellie Liang, Treasury Undersecretary for Domestic Finance, shed some light on the possible launch of a digital dollar, as she leads a new senior-level working group that will explore central bank digital currencies.

Snapshot: Popularly known as CBDCs, these tokens would represent a nation’s fiat currency, and became notable after President Biden signed an executive order on cryptocurrency policy (see what SA contributor Allard Peng said it would mean for DeFi at the time). Current discussions center around whether a CBDC would preserve the dollar’s global strategic role with regards to the architecture of the international financial system, and benefit U.S. households in terms of lowering transaction and borrowing costs. Other priorities include preserving national security, protecting privacy and preventing illicit financial transactions.

Nellie Liang

Liang also noted that CBDCs are only one of several options for upgrading the Fed’s legacy capabilities in terms of efficiency and competitiveness. Another one is real time payment systems, like the FedNow Service, which is expected to launch later this year. “There are also risks of a retail CBDC, including the potential for runs into a retail CBDC that could destabilize private sector lending during stress periods,” she added. “The Fed is conducting technology research and experimentation to inform design choices so that it is positioned to issue a CBDC if it were determined to be in the national interest.”

How do CBDCs differ from electronic cash? When money is deposited into a bank account, the commercial entity takes responsibility for the sum. The cash is then held in electronic form and can be used across a variety of platforms, but it’s limited to the bank’s ledger. In the case of CBDCs, the government is the counterparty and takes liability for the money, while the ledger that’s being used (known as the rails) can be a very different structure than a commercial institution.