The Federal Reserve’s deliberate approach to creating a central bank digital currency is appropriate, tech vendors at a recent conference said.
The central bank’s caution gives the U.S. time to see what other early adopters and risk takers encounter in regulatory red tape and business and consumer adoption, they said. The Bank of England, People's Bank of China, Bank of Canada and central banks in Uruguay, Thailand, Venezuela, Sweden, Singapore and other countries are further along in developing central bank digital currencies, and Russia has been developing its crypto ruble the past two years.
Executives from IBM, R3 and Public Mint shared their thoughts on CBDCs and on Facebook's attempt to launch its own digital currency.
The
A CBDC uses an electronic record or digital token to represent a virtual form of the fiat currency in a particular country. Because it is centralized, the CBDC would be issued and regulated through a monetary authority in the country.
Legacy systems are one reason the United States lags in adoption of CBDCs — "we are still using checks in the U.S.," said Nitin Gaur, director of financial sciences and digital assets at IBM.
Gaur was part of a panel of digital commerce experts discussing the state of CBDCs and stablecoins in the U.S. and globally during last week's annual virtual Mobile Payments Conference. The online-only conference was organized and hosted by the consultant Marla Ellerman.
Once the U.S. does decide to create a central bank digital currency, it could move along well because of the dollar’s power globally, Guar said.
"The U.S. dollar has the privilege of being the world's currency," Gaur said, noting about 75% of all global transactions take place with U.S. dollars or backing.
That the U.S. is moving carefully on a central bank digital currency is unsurprising, given its history of dragging its feet on chip card and mobile payment adoption, panelists said.
"For CBDC, a cautious approach is a good thing for the U.S., whether it lags behind China or not," said Muneeb Shah, product strategy and commercialization head for payments at New York-based R3, a bank-supported consortium that facilitates blockchain-like networks. "The U.S. can wait to see how adoption takes place in China."
Swift, the global financial messaging standards body, advises central banks contemplating countrywide digital currencies as well as individual banks thinking about issuing stablecoins to stick with
"It would be very hard for banks to move away from ISO 20022" and "almost impossible" to suddenly drop that and convert to digital, Shah said.
Early adopters always take risks with any new technology, and the U.S. doesn't need to take on extra risk until it sees how those challenges are handled in other regions of the world, said Paulo Rodrigues, CEO of Public Mint. The Dover, Delaware, company launched a blockchain-based payment network in July 2020.
"Taking a conservative approach, though not too conservative, is good, much in the same way Swift has approached technology over the years," Rodrigues said.
Learning from Libra
The panel also reflected on Facebook’s aborted attempt to create its own digital currency, Libra, which was to be based on a basket of fiat currencies.
After being forced to drop Libra, Facebook helped create the Diem Association, which has proposed
"Facebook had its own challenges with trust" regarding data handling, security "and its early inability to explain the economic model of Libra," Gaur said. "It could not explain how it would drive value globally, and that was one of the shortcomings of their approach."
As such, it made more sense to ditch the Libra model and come back with Diem and the more stable approach of a U.S. bank issuing the stablecoin and supporting it with fiat currency, Gaur added.
Any large tech company considering creating its own digital currency is likely to meet with the kind of regulatory resistance Facebook did.
"It becomes very difficult to justify that there won't be any conflicts of interest with the big tech companies or with their shareholders" when they become a currency provider, Rodrigues said.
"Big fintechs can, and will, embrace more efficient ways of tackling money movement, and that is a need the market is expecting," he added. "They need to learn how to transfer money, just like they did with" email systems.
Would a CBDC lead to stronger payment rails?
The development of CBDCs and stablecoins could improve payment network stability and strength, according to tech executives at the conference. Technology experts generally agree that digital networks and distributed ledgers are better designed for tokenizing and storing data in the cloud, while also eliminating some current account coding methods and payment card numbers that fraudsters focus on.
Those benefits are not lost on the U.S. Office of the Comptroller of Currency.
Earlier this year, the OCC, making it clear it neither encourages nor discourages the use of these new technologies, informed national banks that they could
The agency's interpretation said the nation's banks could use independent node verification networks — databases designed to share information across multiple computers — in this process.
Stablecoins were included because they are tied to the value of fiat currency, which would cut down on dramatic value swings.
The OCC letter specified that use of the node verification networks and stablecoins "may enhance the efficiency, effectiveness and stability" of payments and may be "more resilient than other payment networks because of the decentralized nature of INVNs."
In practical use cases, stablecoins and digital currencies are used for cross-border B2B payments, but could also be used for consumer retail remittances. More movement into the retail space would advance security and cut costs associated with current payment networks, the experts say.
Concurrent development of stablecoins and CBDCs would ultimately help developers create a network in which the two would be interoperable and complement each other's advancement.
"In the next two years, stablecoins could be the de facto currency for cross border payments," Shah said. "We are working toward that evolution now."
In addition, stablecoin could become a standard currency in closed-loop systems, Shah said. "It could be no different than a company like [the energy company] BP issuing a fleet card for employee payments within the BP ecosystem; stablecoin could be that payment mechanism."
Companies like Amazon and Tesla say they will start to accept cryptocurrency payments, which could open the door for more use cases, Shah said. "The appetite is there and the element of these companies moving into [stablecoins] is there," he said.
There's space for more stablecoins, and "we might eventually see more issued," including in the retail sector, Shah said. Starbucks customers, for instance, would make purchases with digital currency, he said.
