What is the Central Bank Digital Currency Provision?

The inclusion of the central bank digital currency provision in the NDAA represents a significant shift in how the government approaches the digital financial landscape. The Anti-CBDC Surveillance State Act mirrors previous legislative efforts by House Majority Whip Tom Emmer, who had introduced similar measures to restrict the Federal Reserve’s ability to issue CBDCs directly to individuals. This standalone bill passed a vote in the House earlier this year with a narrow margin of 219-210.

The Concerns Over CBDCs

At the heart of the debate is the fear that CBDCs could transform into tools for extensive financial transaction monitoring. Critics like Emmer argue that a CBDC, if not carefully designed to resemble cash, could result in government overreach into citizens’ financial activities. This concern is shared by many Republicans who worry about the implications of a potential “surveillance state.”

Federal Reserve Chair Jerome Powell has previously assured that no CBDC would be issued by the central bank without the explicit approval of Congress. Despite these assurances, the tension around the issue has not subsided.

Political Divide on the Issue

The central bank digital currency provision has sparked a visible divide between political parties. While Republicans focus on privacy concerns, Democrats have criticized the bill for potentially stifling technological advancement and research. They argue that such measures could put the US behind other countries progressing in digital financial systems.

As the NDAA is an annual authorization of defense funding, its passage is crucial. The Senate is slated to vote on their version when sessions resume in Washington, with the House expected to follow suit.

If the bill passes with the CBDC provision, it could set a new precedent for how digital currencies are managed and regulated in the United States.

In conclusion, the inclusion of the central bank digital currency provision in the NDAA has brought to the forefront essential discussions about privacy, surveillance, and the future of digital currencies. As the Senate vote approaches, the outcome remains uncertain but undoubtedly impactful.

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There are thousands of different cryptocurrencies, or digital currencies, in circulation today. Bitcoin and similar cryptocurrencies are instances of decentralized digital currency.

Because cryptocurrencies are built on distributed ledger technology (DLT), the veracity of a transaction is verified in real time by a decentralized network of computers as opposed to a centralized server.

Payments between banks, organizations, and people are expedited and secured because CBDC is controlled on a digital ledger (which may or may not be a blockchain).

One of the biggest game-changing developments in the world’s financial system right now is the introduction of digital currencies issued by central banks. There have been a lot of uncertainties in the business community over the Crypto vs. CBDC debate. Let’s examine the many ideas behind CBDCs and draw parallels between cryptocurrencies and digital currencies issued by governments.

CBDCs, and Their Various Forms

Payment, clearing, and settlement systems may benefit from the creation of a CBDC, either a general-purpose or wholesale only one.

General-Purpose CBDCs

In this context, “general-purpose CBDC” is a CBDC intended for widespread use. Privacy, transparency, and accessibility are its main advantages. Among the benefits of DLT-based retail CBDC is its availability around-the-clock, every day of the year.

The goal to promote financial inclusion by speeding up the transition to a paperless society, reducing currency production and handling expenses, and taking the lead in the rapidly expanding fintech sector are all driving this trend.

Wholesale Only CBDCs

Reserve deposit-keeping financial institutions are the target market for a wholesale CBDC. One possible use is to lessen the potential for losses due to insufficient funds or other factors affecting the financial stability of a business’s counterparties, hence improving the efficiency of payment and securities settlements.

A value-based wholesale CBDC would replace or complement central bank reserves with an encrypted digital token. In a token-based system, the value is transferred directly from the issuer to the holder of the token, eliminating the need for any third parties.

If the central bank really moved money instead of just debiting and crediting accounts, it would be a major change from the existing system. The wholesale CBDC is the preferred idea among central banks because of its ability to enhance current wholesale financial systems swiftly, cheaply, and securely.

What States Have a CBDC?

Before COVID-19, central bank digital currencies were mostly only a thought experiment. Central banks quickly recognized that they couldn’t afford to lose out on the development of money in light of the necessity to provide massive monetary and fiscal stimulus throughout the globe and the growth of cryptocurrencies.

More than 90 nations (representing over 90% of global GDP) explored joining a CBDC, as reported by the Atlantic Council. In May 2020, just 35 states were actively investigating the possibility of a CBDC.

China has gotten ahead of the game by allowing international tourists to use digital yuan to transmit passport information to the People’s Bank of China for the Winter Olympics. When compared to the European Central Bank, the Bank of Japan, and the Bank of England, the Federal Reserve of the United States lags far behind.

Five countries have now completed the rollout of a digital currency. Historically speaking, the Bahamian Sand Dollar was the first commercially accessible CBDC. The entire rollout of CBDCs is now being tested (i.e., at the pilot stage) in fourteen countries, including significant economies such as Sweden and South Korea.

Crypto vs. CBDC

It’s easy to get central bank digital currencies mixed up with other cryptocurrencies. As we’ve already said, the central bank is the hub of the financial system in central bank digital currencies. Contrarily, cryptocurrencies like Bitcoin are digital tokens generated using cryptographic processes by a decentralized network, sometimes known as a blockchain.

Different from the permissioned (private) blockchains used by CBDCs, permissionless (public) blockchains are used by cryptocurrencies. If the blockchain is open to the public, anybody may join and contribute to the core functions of the network. Public blockchains are able to maintain their decentralized character because anybody can see, edit, and verify transactions taking place on the network. However, a private blockchain is not decentralized and instead acts as a closed, secure database built on cryptographic principles.

A centralized authority determines the limits of CBDC networks. In crypto networks, users collectively have the power to make decisions via consensus.

That’s why CBDCs are centralized and cryptocurrencies aren’t. Furthermore, cryptocurrencies provide privacy, whereas CBDCs open the door for central banks to track asset ownership. Instead of using blockchain for its foundation, as is common with cryptocurrencies, CBDCs are more likely to operate on their own dedicated technical infrastructure.

Moreover, CBDCs are not stablecoins, which are monetary units tethered to a fiat currency such as the U.S. dollar. It’s important to note that a CBDC wouldn’t be “pegged” to anything; it would simply be the fiat currency. If you were to compare a CBDC $1 note to a regular dollar bill, you wouldn’t be able to tell the difference.

CBDCs are restricted for use as a means of payment only and are not to be held in reserve or utilized for speculation. Cryptocurrencies, however, have practical use in both commercial and speculative contexts.

CBDCs would place less emphasis on protecting user information than cryptocurrencies. The crypto industry is undeniably decentralized and operates on a peer-to-peer model, whereas central banks are bound by a number of regulations.

Since cryptocurrency transactions occur directly between users, they may decide what information to provide and how much. The opposite is true with CBDC transactions since massive volumes of data will be sent automatically to tax and regulatory authorities. 

Benefits and Drawbacks of Digital Currencies Backed by Governments

Benefits are numerous, and here are the main advantages of CBDC to consider.

CBDCs streamline the execution of monetary policy and other government operations, which is a major pro. Wholesale CBDCs are used to automate the steps required to establish a connection between a client and a central bank, bypassing the intermediary banks. These digital currencies may streamline administrative operations for other government functions like the doling out of benefits and the computation and collection of taxes.

Transferring funds involves middlemen, who might add unanticipated delays or even fraud to the deal. What happens if a bank run happens because of anything like a rumor or an outside event like a financial crisis? The stability of a monetary system may be jeopardized by such occurrences. The risk of a CBDC is reduced since the central bank is accountable for any risks.

CBDC systems allow for the fine-tuning of privacy parameters. In a retail setting, a CBDC with monetary value functions similarly to cash while maintaining users’ privacy via transactional anonymity. On the other hand, CBDCs are accessible through accounts, function like regular bank accounts, and may provide privacy safeguards.

Since CBDCs are digitally recorded and can be monitored without serial numbers, they may be used to discourage criminal activity. By adopting cryptography and a public ledger, a central bank may readily track money across its territory, preventing criminal activity and unlawful CBDC transactions.
One of the obstacles to financial inclusion for large sectors of the unbanked population, especially in developing countries, is the cost of constructing the banking infrastructure required to provide them with access to the financial system. Without investing in expensive infrastructure, CBDCs may facilitate communication between clients and central banks.

Cons are also essential when it comes to substitution of the central bank’s currency.

CBDCs aren’t always the best solution to deal with centralized issues. A centralized body is still to be given the power to carry out financial transactions (i.e., the central bank). As a consequence, it continues to have an impact on citizen-bank communication and financial data.

Users will have to give up some anonymity since the administrator is in charge of accumulating and transmitting digital identifiers. The service provider would be able to see each and every transaction. As with the largest IT companies and ISPs, it might result in privacy problems. Criminals might compromise systems and abuse data, and governments or banks could block transactions between individuals.

Financial transactions spanning many countries and currencies may be facilitated via CBDCs around the clock, regardless of local business hours or holidays. However, international transactions are hampered by the existence of different legal and regulatory frameworks. Combining these models would be difficult.

Unintended repercussions on currency markets from CBDCs cannot be ruled out. If the digital yuan becomes the dominant payment method in China, international businesses may be compelled to accept it as a means of payment, which might jeopardize the dollar’s status as the world’s reserve currency.

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When it comes to the development of the Central Bank Digital Currency (CBDC), Europe is falling behind several countries that already successfully implemented digital asset pilot programs at various stages.

Most recently, the Eastern Caribbean Central Bank (ECCB) launched the pilot of its CBDC, DCash. According to the source, users living in Saint Kitts and Nevis, Antigua and Barbuda, Grenada, and Sant Lucia can now use the app to transfer digital currency to other users or pay to merchants.  

The Bank of Jamaica announced the pilot of its CBDC to happen between May and December 2021. Moreover, the technology for the pilot will be provided by the Irish company eCurrency Mint.

Despite not planning to launch its own CBDC in the near future, the Bank of Japan (BOJ) is planning to experiment with CBDC this spring. BOJ conducts research and experiments to prepare for the issue of the CBDC when there is a need for one.

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In an announcement from October 2020, the Bank of Japan outlined its approach to preparations for the issuance of CBDC. It explained the steps as a way to making the payment system more efficient and responsive to change.

Several other banks around the world are at different stages in their CBDC rollout process. In particular, a survey conducted at the end of 2019 by the Bank for International Settlements (BIS) found that 80% of participating central banks (66 surveyed) had CBDC in the works.

For instance, in South Korea, Shinhan Bank completed a pilot of the digital won, in preparation for the CBDC rollout by the central bank. Moreover, the central bank of Jamaica is planning to pilot the CBDC in December 2021 before the launch in 2022. In addition, the digital yuan is scheduled to launch before the Winter Olympic Games in 2022.

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Reuters says Goldman Sachs is also exploring other blockchain projects. For instance, those include such initiatives as CBDCs (Central Bank Digital Currencies) and a bitcoin exchange traded fund. Decrypt says there was no comment from the company regarding dealing futures contracts for other cryptocurrencies at the moment.

The company planned to open a Bitcoin crypto trading desk in 2018. However, they put the idea on hold because of the unclear crypto regulations at the time. It seems that the risks unique to cryptocurrency trading presented some of the reasons for pausing the initiative.

Goldman Sachs’ decision to deal Bitcoin futures comes while Bitcoin seems to be recovering from the fall it experienced last week. Its price dropped from an all-time high of about $58,000 on February 21, losing over $10,000, as it went below $44,000 on Sunday, February 28. It is slowly recovering by reaching the 24-hour high of $50,127, with a 24-hour gain of around 2%, and is trading around $49,000 at the time of writing.

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The parties that took part in program development are a fintech company EMTECH and the Bank of Ghana, the source says. It is also suggested that the same platform will be used to perform tests of Central Bank Digital Currency (CBDC).

Ghana has taken part in several blockchain initiatives over the years. In 2015, the BenBen’s digital land database was established to combine all land registries in the country in one system powered by the blockchain. Moreover, in 2016, a blockchain startup Bitland piloted a land survey and title deeds recording project in 28 communities in the country, as per a press release.

In 2019, mobile provider Vodafone Ghana teamed up with IBM, HackLab Foundation, and Stanbic Bank for a blockchain innovative program to have taken place at a hackathon for university students. And in the same year, a Central Bank executive spoke about the possibility of issuing a CBDC in the future.

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The source says that Beijing is planning to roll out digital yuan before the Winter Olympic Games in 2022, which means that the token will be issued less than a year from now. Amidst the preparation, the police report scammers being on the rise. Cryptonews.com, citing a post from a police unit in Shandong Province, talks about a scam involving 500 users of the CBDC who were led to believe they would get access to a governmental fund and can make over $20,000 for participating.

Other fraudsters can also be more active as people show more interest in the digital yuan. China has been well on the way to launching the token, with several promotional events taking place this and last year. The most recent trial took place in Beijing before the Lunar New Year, where 50,000 citizens each received 200 digital yuan in a random drawing.

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