But CBDCs are complex. They offer some potential benefits (providing financial resources to underbanked populations, for example) and potential drawbacks (including significant privacy concerns). For now, here's an introduction to some of the basics, as well as an overview of which countries are working on CBDCs and some clues about how a central bank digital currency might work in practice.
What is a central bank digital currency?
It's the virtual form of a fiat currency -- that is, government-issued money that isn't backed by other commodities like gold or silver. In short, a CBDC is just the digital form of a country's official currency. As nothing more than a computer code, these currencies could be stored on central ledgers within a country's national bank or on a distributed ledger the way private cryptocurrencies like bitcoin are.
What factors are driving interest in CBDCs?
The rise of cryptocurrencies is serving as a wake-up call to national governments, which have long held a monopoly on currency issuance. Concerns over that monopoly being threatened appear to be what's driving interest in CBDCs, according to Gustav Peebles, a professor of anthropology and an expert in monetary history, theory and policy at The New School in New York City.
"Currencies throughout history can either be issued by the public or by private entities, and what crypto has shown us or has delivered is a reignition of an age-old fight between private and public currency issuance," said Peebles. "Central bankers suddenly got blindsided; and so, a central bank digital currency is central bankers trying to hold on to their monopoly over currency issuance in the face of erosion of that monopoly."
The money would essentially be in an account you'd have with the Federal Reserve or some entity such as a private bank that the Federal Reserve partners with. When you paid for something, the Federal Reserve would take money from your digital wallet and deposit it directly into the other party's digital wallet, bypassing the complex web of networks currently involved in electronic payments. As a plus, this would remove fees generally associated with such payments.
US digital wallets could upend commercial banking
Digital wallets issued by the Fed, though, would be a destabilizing form of CBDC. "It really messes with the general pyramidal structure of central banking as a concept, which has always been that central banks are not bankers to average citizens," according to Peebles. As a rule, central bankers oversee the banking system, whereas private banks interact with the consumer.
Such a shift would be destabilizing, Peebles noted, because if the average person can make everyday payments through a Fed account, there's less reason to keep an account at a private bank. "That might push private banks away from what they've gradually morphed into today -- this deposit facility -- and send them back to their original task: just providing loans," Peebles said.
Not only is it destabilizing, the Fed's report appears to throw shade on the idea that the Fed currently has the authority to create such accounts. Moreover, the Fed could be signaling that it's wary about expanding its current role to these proportions.
"The Federal Reserve Act does not authorize direct Federal Reserve accounts for individuals, and such accounts would represent a significant expansion of the Federal Reserve's role in the financial system and the economy," the report said.
A less destabilizing CBDC proposal wouldn't require a federal account but would involve a "cash card," that is, a card that customers of private banks could use at ATMs to load up on digital cash instead of paper money. "Just like paper money, if the holder lost that card or had their wallet stolen, the card would have value on it that anyone could use," Peebles said.
One possible sticking point could be if people are using their Fed accounts to purchase illicit goods, such as cannabis. While states across the country have legalized cannabis for medical and recreational use, it's still illegal on a federal level. If someone purchased the substance from a dispensary using digital dollars, the government could theoretically decide to impose criminal sanctions for the transaction.
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