The U.S. Senate on Wednesday conducted a hearing related to a possible rollout of a Central Bank Digital Currency (CBDC), urged on by academic and private sector experts who are pushing for the Federal Reserve to step up its efforts. The Senators and witnesses pointed to the need to establish the U.S. CBDC as the global standard bearer. The digital currency would be backed by the government’s central bank. 

In her opening remarks, U.S. Sen. Elizabeth Warren noted a need for CBDC to offer a banking solution to the unbanked and head off the traction of cryptocurrency, saying: “Legitimate digital public money could help drive out bogus digital private money, it could help improve financial inclusion, efficiency and safety of our financial system, if that neutral public money is well designed, and efficiently executed.” 

During the hearing, which addressed the financial opportunities and implementation challenges of a digital dollar, witness Neha Narula, director of MIT’s Digital Currency Initiative, described the CBDC as a tool to “increase competition and standardize disparate data models, leading to more interoperability and creating a platform for innovation in payments.”

Narula went on to compare the tool to the internet, which “created a platform for innovation on top of the transfer of information.” The Boston-based university is currently collaborating on research with the Federal Reserve Bank of Boston to better understand the CBDC.  

Vying for standard bearer

A Bank for International Settlements survey of 65 central banks published in January indicates that 86% are working to establish a CBDC. At the hearing, U.S. Sen. John Kennedy pointed to security concerns related to China leading the U.S. to the table with its own recent pilot of the digital yuan. Meanwhile, Sweden’s Riksbank is stepping up efforts for a digital currency and the Central Bank of the Bahamas in October 2020 issued the world’s first central bank digital dollar, the Sand Dollar.  

Addressing fears that the lack of a CBDC would leave the U.S. at a global economic disadvantage, witness Christopher Giancarlo, senior counsel, Willkie Farr & Gallagher and former chairman of the U.S. Commodity Futures Trading Commission, asked: “Will the digital commodities and contracts of the future still be priced and accounted for in U.S. dollars if the U.S. currency remains an analog instrument, not digital and programmable?” 

Giancarlo also serves as the co-founder of the Digital Dollar Foundation, a public-private partnership focused on the creation of CBDC. In May, the Digital Dollar Foundation announced five separate pilots, funded by consulting firm Accenture, to explore possible designs and uses of a digital dollar backed by the U.S. Central Bank.  

While details of the pilots have not yet been released, “it would be much more meaningful and positive if the project were led by the Federal Reserve,” Avivah Litan, a blockchain analyst at research firm Gartner, told Bank Automation News. 

Federal Reserve Board Chairman Jerome H. Powell has indicated the need for more study of a CBDC, and a May 20 announcement that the Fed would soon publish a discussion paper exploring the issuance of the currency points to signs that the Fed could be succumbing to pressure to move the process along.  

Automation and stakeholder concerns 

However, questions remain when it comes to launching a CBDC, particularly whether the Fed would offer the digital currency directly to consumers or through financial institutions. A CBDC is likely, said Litan, but the rollout may be at least a year away, due to the many stakeholders involved, as well as global interoperability and standardization questions, privacy issues, and regulatory concerns. “Countries and banks will need to establish the infrastructure rails and standards for storing and transferring digital currency,” she added.  

Financial institutions have an interest in making sure they have a seat at the table alongside fintechs when it comes to a CBDC. “Banks are concerned that they can be disintermediated by CBDCs, as fintech companies can offer products and services around them that bypass the retail and wholesale banks,” Litan noted.  

Litan told BAN that she is unsure the U.S. would take the lead on a CBDC. “I think there will be different islands of monetary systems for global trade, that can interoperate, if need be, and some, for example, the China-led system, will bypass U.S. controls and currency dominance. This will take years to play out.”  

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