Tribal Economies

Fed Releases Long-Awaited Digital Currency Paper: Analysts Discuss Privacy Issues

Susan Walsh/AP/

The Federal Reserve Board released its long-awaited discussion paper on the pros and cons of a possible US central bank digital currency (CBDC) on January 20, inviting the public to comment. A digital currency being adopted would have a massive economic influence on national and international economies.

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Although it is the first step in a discussion of whether – and how – a CBDC could improve the safe and efficient national payments system, the document does not promote any political outcome, said the Fed in a statement.

“We look forward to engaging with the public, elected officials, and a wide range of stakeholders as we consider the positives and negatives of a central bank digital currency in the United States,” the Reserve Chairman said. Federal, Jerome Powell, in a press release.

The 33-page document – which was expected “soon” in July 2021, according to Powell’s comments at the time – summarizes the current state of the national payments system and discusses the different types of digital payment methods and assets. that have emerged lately. years, including stablecoins and other cryptocurrencies.

Analysts dig into digital currency

Ari Redbord, head of legal and government affairs at blockchain intelligence firm TRM Labs, told GOBankingRates that the Fed document is really a first step in what could be a very long journey to a CBDC — especially given of the assertion that the Fed would look to Capitol Hill for authorizing legislation, which will take time.

“That said, the Fed, for the first time, is laying out what it would expect from a CBDC – that it could be used to buy goods, pay taxes, and be programmable to make payments at certain times. . The Fed also weighs the pros and cons of benefits such as financial inclusion and cross-border payments against risks such as stability and financial crime,” Redbord said.

“The bottom line is that the United States is really before the first inning when it comes to launching a digital dollar. Compared to other countries, we are arguably behind the times, but, at the same time, it also signals the Fed’s desire to work with the White House and the Hill to get it right when, and – big question – yes, we are heading towards a digital dollar.

The Fed notes in the document that while a CBDC could provide a secure digital payment option for households and businesses as the payment system continues to evolve — and may result in faster payment options between countries — there could also be downsides. The document explains how to ensure that a CBDC would preserve monetary and financial stability and complement existing means of payment. Other key policy considerations include how to preserve citizens’ privacy while maintaining the ability to tackle illicit finance, a key question for several experts.

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Michael Carter, chief compliance officer at crypto exchange Bittrex, told GOBankingRates that while CBDCs deliver on the promise of benefiting the banking and financial system by providing increased efficiency, a digital dollar can also hold enormous power in terms of monitoring of each transaction made. This could potentially pose a serious threat to privacy, so safeguards should be put in place to protect individuals from intrusions that threaten their civil liberties, Carter added.

“Crypto assets – which are categorically different from CBDCs – could be implemented in tandem with CBDCs to ensure both efficiency and proper privacy. Although in theory, CBDCs have the potential to completely normalize cryptocurrency by increasing the adoption and use of digital assets, it is imperative that the benefits that make crypto so attractive today are not compromised. accordingly,” Carter concluded.

Privacy issues surrounding a digital dollar

This sentiment is shared by several experts who, while highlighting the benefits of CBDCs, also warn of potential complications.

Ehab Zaghloul, chief researcher at Tribal Credit, told GOBankingRates that under a CBDC, the Fed would have very detailed information about each individual’s spending and credit history. In turn, interest rates could be specifically tailored to the credit health of a particular individual.

“It would be much more efficient than the current system, which sets rates almost like a hedge across the whole economy and, in turn, often sets rates too high or too low when it comes to making match people’s individual credit profile. and businesses. In short, with a CBDC, everything can be scaled for maximum efficiency, helping to drive national growth. »

The caveat, Zaghloul added, is that there is a huge potential cost that accompanies such efficiency — namely, the complete lack of privacy consumers face if cash dollars are replaced with digital dollars. Digital dollars could be traced and tracked in excruciating detail.

“Every purchase or donation has the potential to be recorded by the government and misused in several disturbing ways, which is why it is incumbent on the government to create policies that protect the privacy of citizens. several ways – for example, by allowing a CBDC to operate alongside cryptocurrencies,” he said, as cryptos can provide an enormous amount of privacy via encryption.

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“So perhaps a healthy balance could be struck where a CBDC is balanced against the privacy features of Bitcoin and other cryptocurrencies. This is a topic we can expect to feature more widely in the national debate as people work to ensure that we can access the full benefits of CBDCs without suffering the potential breach of privacy,” said he added.

The Fed said that to fully assess a potential CBDC, it is seeking public comment on 22 questions with a posted deadline of May 20, 2022.

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About the Author

Yael Bizouati-Kennedy is a former full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She has also worked as a VP/Senior Content Writer for major New York-based financial firms, including New York Life and MSCI. Yael is now independent and most recently co-authored the book “Blockchain for Medical Research: Accelerating Trust in Healthcare”, with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in journalism from New York University and one in Russian studies from Toulouse-Jean Jaurès University, France.