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FMG Law Blog Line

Central Bank Digital Currency: Oxymoron or Near Reality?

Posted on: October 22nd, 2020

By: Peter Dooley

In a sharp change of course and softening of rhetoric, Federal Reserve Chair Jerome Powell gave a speech on Monday, October 19th at the International Monetary Fund’s Annual Meeting in which he left the door open to the creation of a digital currency backed by the central bank in the near future. The idea of a central bank digital currency, which has been given the catchy abbreviation CBDC, is not a novel idea, but the consistent reluctance of the U.S. Federal Reserve to wade more than ankle-deep into the world of digital currencies makes Powell’s comment particularly noteworthy. The Federal Reserve’s prior hesitancy has quickly given way to comments about “carefully and thoughtfully evaluating the potential costs and benefits of a central bank digital currency for the U.S. economy and payments system.”

This movement towards further exploration of digital currencies is not just a policy stance change for the Federal Reserve, but it also feels odd due to the origin of digital currency and the underlying blockchain technology. A digital currency backed by the U.S. government is a far cry from the origins of blockchain, Bitcoin, and the de-centralized unregulated wild-west conditions that birthed most cryptocurrencies around today. Regardless of the loss of outlaw appeal, the potential benefits that a centralized digital currency could bring in terms of speed of international payments, increases in efficiency of record storage and verification, and the general increase in cyber-security and privacy for which blockchain and digital currencies may be too advantageous for governments to pass up.

The U.S. is not alone in its efforts either as nations such as Canada, Sweden, China, and Japan are already in the experimentation phase with their own government back digital currencies. Despite the newfound love for digital currencies, the Federal Reserve continues to make it clear that a potential digital currency would not be “a replacement for cash, and current private-sector digital forms of the dollar, such as commercial bank money.” Experimentation will be important, but a larger source of delay is likely to be in drafting the extensive regulations surrounding the digital currency while simultaneously assuring that these regulations and payment processes are consistent with International Monetary Fund agreements and other international frameworks and treaties.

A U.S. CBDC is in no way a sure thing, but these statements showing interest and experimentation with the likes of MIT give reason to believe that the Federal Reserve is seriously warming up to digital currencies. In addition, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) recently decided to further regulate and place sanctions on payments of malware ransoms through digital currencies and this move further illustrates the federal government’s new desire to stake its claim in this sector. These first of their kind sanctions are explained in detail in the recent blog post of Caitlin Tubbesing. While it’s also not likely that we will have one of the first CBDC’s in circulation, the Federal Reserve’s shifting tone lends further credence to the idea and provides reason for optimism in wide-scale implementation of blockchain and digital currencies on a national level in the not too distant future.  

As governments and businesses continue to increase involvement in the sector of blockchain and digital currencies, it is important to stay up-to-date and vigilant for any ways this could affect your company’s cyber-security and policies and procedure in general.

If you have questions or would like more information, please contact Peter Dooley at [email protected].

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