Latest updates on the U.S. effort towards a digital dollar

The crypto world has taken a hit since the FTX disaster echoed throughout the system for the past few months, and this week witnessed a solvency crisis at crypto-focused bank Silvergate Capital. Bitcoin (BTC-USD) (+34% YTD), Ethereum (ETH USD) (+29% YTD) and other tokens managed to shake off the headlines, and talk of a more centralized industry is heating up again. Nellie Liang, Treasury Secretary for Domestic Finance, bring some light into the darkness on the potential launch of a digital dollar, as she chairs a new high-level working group that will examine central bank digital currencies.

Snapshot: These tokens, popularly known as CBDCs, represented a nation’s fiat currency and came to prominence after President Biden signed an executive order on cryptocurrency policy (see what SA staffer Allard Peng said about what this meant for DeFi at the time would mean). Current discussions revolve around whether a CBDC would preserve the dollar’s global strategic role in the architecture of the international financial system and benefit US households in terms of reducing transaction and borrowing costs. Other priorities include safeguarding national security, protecting privacy and preventing illegal financial transactions.

Liang also noted that CBDCs are just one of several options to improve the Fed’s legacy efficiency and competitiveness skills. Another is real-time payment systems like the FedNow service, which is expected to launch later this year. “There are also risks of a retail CBDC, including the possibility of retail CBDC happening, which could destabilize private sector lending during periods of stress,” she added. “The Fed is conducting technology research and experimentation to make design decisions so that it is able to issue a CBDC if it is determined to be in the national interest to do so.”

How are CBDCs different from electronic money? When money is deposited into a bank account, the commercial entity takes responsibility for the sum. The cash is then held in electronic form and can be used on a variety of platforms, but is limited to the bank’s ledger. Companies like Venmo can even track electronic transactions in their own internal ledger system, but the money is still held and tracked by a commercial banking provider. In the case of CBDCs, the government is the counterparty and takes liability for the money, while the ledger used (known as rails) can have a very different structure than a commercial institution.

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