In March 2022, Joe officially asked the Federal Reserve (FED) to urgently begin developing plans for a U.S. Central Bank Digital Currency (CBDC), or a so-called ‘digital dollar’. The US government is now starting to recognize the latent possibilities of the burgeoning digital asset market and hopes to use this technology to create a CBDC that will But what is a CBDC? How does it relate to cryptocurrency, and what are the latest developments in the great CBDC experiment? Biden “preserve the dominant role of the U.S. dollar.” What is a CBDC? The FED a CBDC as “a digital liability of a central bank that is widely available to the general public.” The ‘digital’ part is not so innovative insofar as most people these days already hold money in a digital form one way or another, such as commercial bank accounts. The uniqueness of a CBDC primarily lies in the fact that it is a central bank liability rather than a classic commercial bank liability. defines When a person holds money at a commercial bank, the commercial bank itself has an obligation to ‘pay out’ upon request and exchange the digital record of money for physical cash. However, in a system like ours today, banks have a limited asset pool with which to fulfill these obligations and they must rely on mechanisms like deposit insurance to maintain consumer confidence and avoid . Hence, the ‘digital money that is the liability of a commercial bank comes with a great deal of systemic instability. At any moment, an event could cause consumers to get spooked. fractional reserve banking bank runs People queue around the block to get USD from an ATM in St Petersburg, Russia on  March 8, 2022. Image credit: ‘Нетиптчный Питер’ Telegram Channel For a CBDC, the issuing central bank is the institution with an obligation. Unlike commercial banks, a central bank possesses a monopoly on increasing the monetary , and thus holding a CBDC entails far fewer confidence-related vulnerabilities and no obligation to maintain an underlying asset pool since the central bank could always just issue more CBDCs. A CBDC is, therefore “analogous to a digital form of paper money” as it can be used without a “credit or liquidity risk.” base While acknowledging the huge successes and “explosive growth” of digital currencies like Bitcoin, the President expressed concern about the risks of unregulated cryptoassets for “consumer protection, financial stability, national security, and [the] climate.” In the hope of mitigating these risks, as well as “harnessing the potential benefits” in order to “reinforce American leadership in the global financial system,” Biden asked federal agencies to explore the creation of a US CBDC. How does it relate to the rest of the crypto industry? Despite these recent announcements from the U.S. administration, the FED is late to the CBDC party. In a , released in January 2021, 56 of the 65 central banks surveyed were engaged in some kind of CBDC development. One of the major motivations spurring central banks to continue research in this area are the “cross-border [payment] implications” of CBDCs. The FED that current cross-border payments “remain slow and costly.” Improving cross-border payments relies on fully utilizing “new technologies,” which is where private crypto firms come into the picture. BIS Paper recognized The development of a CBDC is not the only form of payment modernization that could bring about improvements. A written by an Arab Monetary Fund advisory group listed 3 alternatives including improvements to messaging protocols, coordination of existing RTP (Real Time Payment) systems, and the use of cryptocurrencies. white paper Messaging protocols include providers like , , and that essentially increase the efficiency of the old-style model where banks use their deposits in different countries to pass-along funds through a chain of intermediaries to the final recipient. SWIFT Revolut RippleNet correspondent banking ‘Coordinating RTP systems’ is the approach taken by providers like and is based upon promoting cross-border interoperability between instantaneous, domestic payment systems. The Clearing House Finally, although usually used more often as a speculative investment, specialist cryptocurrencies designed as a payment solution, like , have the potential to bypass the entire legacy payment system. They operate as standalone currencies that can be instantly passed between digital wallets across national borders. Ripple XRP Image credit: blokt These potential solutions are important to note because, to put it simply, CBDCs may well become redundant if one of these alternative forms of payment modernization is adopted by mainstream financial institutions. For example, major banks like and are already adopting new RTP systems and the FED’s white paper even named The Clearing House’s a successful “real-time interbank payment system.” Likewise, if the court rules in favor of Ripple in a now infamous , then XRP could face fewer impediments to widespread adoption. Wells Fargo J.P. Morgan RTP network SEC lawsuit So where are we now? CBDCs are by no means faltering despite having plenty of competition in the FinTech arms race. Perhaps the most promising recent development for future CBDCs is the paper, titled ‘International settlements using multi-CBDCs’, published by the in March 2022. In this paper, BIS presents its latest project that aims to create a digital currency platform that would “facilitate cross-border transactions between financial institutions.” They have already successfully developed 2 working prototypes, including . Project Dunbar Bank for International Settlements Patior I’m very optimistic on this matter if you dig into my exploring the uses of blockchain technology in the modern monetary policy you can probably find: paper “The use of blockchain technology…in the monetary policies of states can be implemented by issuing a digital currency that can become an alternative to the current dollar settlement system.” Although the potential of CBDCs is debatable, it is worth considering whether we should be skeptical about the idea of government-supported CBDCs and question whether they would be aligned with the general ethos of cryptocurrency.

How’s the Great CBDC Experiment Going?

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