With conversations on cryptocurrency and digital wallets reaching the level of presidential backing, a new technology might have come across your radar: a central bank digital currency.
A central bank digital currency, or CBDC for short (not to be confused with the hemp-based wellness trend, CBD), is exactly what it sounds like — a digital currency backed by a central bank, which (unlike a commercial bank) manages the policy and monetary policy of a state or related entity. After getting a huge shoutout from Biden, it’s a topic that financiers and technologists alike are looking to unpack and fully define.
So, what exactly is this unique technology that could eventually slide into your digital wallet? We spoke to Jennifer Lassiter, executive director of the DC-based Digital Dollar Project — a partnership between Accenture and the Digital Dollar Foundation to explore a central bank digital currency — on what the future of CBDCs might look like.
What is a CBDC?
A true definition of CBDC, Lassiter said, is still being created, but she expects a few common threads: something tokenized, operating in the country’s two-tiered financial system, and able to exist amongst other currencies in the world. The latter part is important because she does not anticipate one centralized digital currency for the whole globe.
“If every region, every country or sovereign area were to have central bank digital currency, they would all look different,” Lassiter said.
Lassiter added that she does foresee a world where a digital currency could eventually overtake cash. But such a currency would first have to work alongside our current monetary option
“What I hear a lot when folks start to talk about central bank digital currency, it’s, ‘This will take over, it will cancel out the need for cryptocurrency, the dollar will be gone, what about people who want to transact in cash?'” Lassiter said. “I think it’s important to remember: This is just a modernization of financial infrastructure — which, by the way, [financial] policy and infrastructure haven’t been modernized in the US for close to 90 years.”
Why a CBDC?
Lassiter sees four main pressure points that, if executed well, could ground a strong argument for creating a CBDC: national security, privacy, risk management and financial inclusion. National security, she said, is an example that’s unfolding right now, as Ukraine has found success in tapping into digital currencies as residents attempt to flee. Being able to escape a war zone without the need to stand in line at an ATM, she noted, is a real and tangible humanitarian application of digital currency.
In risk management, she said, the US already has a strong, safe and government-backed financial system that provides legitimacy through disclosure requirements. That sets a strong foundation for a CBDC, as well as a jumping-off point for measuring and managing risks from a regulatory perspective. As other power players like Russia and China attempt to lead the digital currency ecosystem, a CBDC also offers chance to keep up and manage any potential risks.
Along those lines, Lassiter also sees a chance to “future proof” the US dollar in its value and current privacy. While she sees privacy as the hardest part of establishing a CBDC, she acknowledged that opportunity exists to bake privacy into the technology and decide who can view transaction details.
The developing nature of CBDCs also provides a chance to establish more financial inclusion. Creating a whole new currency with universal access — and even a whole new financial ecosystem — means that it’s also crucial to be honest about what financial inclusion looks like currently, who has access to and engages with the system and who historically had a voice in its establishment. While professionals in the ecosystem suss out issues and try to wrap their brains about what a CBDC might look like, she said, it’s key to work with people who aren’t fully participating in the current financial system.
“Don’t design for your users,” Lassiter said. “It seems so simple, but design with them, understand how they want to use it, how they might use it, how they think about using it. What is their relationship with money? How does that relationship and trust in the financial systems fit in?”
“It cannot be the same people testifying in front of Congress and the same people sitting on these panels,” Lassiter argued. “We have to get the diversity and perspective because we’re building something that is so much bigger than any one person or one entity.”
How do we get there?
This year has already given the movement for a central bank digital currency strong momentum. Last month, President Joe Biden inked an executive order on digital assets and noted, in particular, the need to look more closely at creating a CBDC. The order encourages the research and development of a CBDC, including assessing the technological infrastructure and capacity needs and the development of a potential plan from the Federal Reserve. In January, the Federal Reserve Board released a paper on the pros and cons of creating a CBDC. The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology’s Digital Currency Initiative are also at work on Project Hamilton, a research project exploring the CBDC design space and potential challenges or opportunities.
Lassiter foresees the conversation hitting Capitol Hill next, with the creation of formal legislation to push CBDC development and research forward. To make that happen, she people to submit their thoughts to the federal government (specifically, she noted that the comment period for the Federal Reserve paper ends May 10, and that Project Hamilton wants technologists to test its security by trying to hack the program).
“There are technologies that will support and flourish in this space that we don’t even know about yet,” Lassiter added. “That’s the really exciting part, which is: How do we draw the right boundaries, and create the right environment, so we’re doing this type of innovation in a responsible way?”
Knowledge is power!
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