What is a central bank digital currency? This is what a digital dollar might look like

As conversations about cryptocurrency and digital wallets reach the level of presidential support, a new technology may have hit your radar: a central bank digital currency.

A central bank digital currency, or CBDC for short (not to be confused with the hemp-based wellness trend, CBD), is exactly what it sounds like – a central bank-backed digital currency, which (unlike a commercial bank) manages the policy and monetary policy of a state or related entity. After receiving a huge shoutout from Biden, this is a topic that financiers and technologists are looking to unpack and fully define.

So what exactly is this unique technology that could possibly slip into your digital wallet? We spoke to Jennifer Lassiterexecutive director of DC based Digital dollar project — a partnership between Accenture and the Digital Dollar Foundation to explore a central bank digital currency – on what the future of CBDCs might look like.

What is a CBDC?

A true definition of the CBDC, Lassiter said, is still being created, but she expects a few commonalities: something tokenized, operating in the country’s two-tier financial system and able to exist among d other currencies in the world. This last part is important because it does not provide for a centralized digital currency for the entire globe.

“If every region, country or sovereign area were to have a central bank digital currency, they would all be different,” Lassiter said.

Lassiter added that she foresees a world where a digital currency could eventually overtake cash. But such a currency should first work alongside our current currency option

“What I hear a lot when people start talking about central bank digital currency is, ‘This will take over, this will negate the need for cryptocurrency, the dollar will be gone, what about there people who want to transact in cash? ‘” Lassiter said. “I think it’s important to remember: this is just a modernization of the financial infrastructure – which, by the way, [financial] politics and infrastructure have not been modernized in the United States for almost 90 years.

Why a CBDC?

Lassiter sees four main pressure points that, if executed well, could make a strong case for creating a CBDC: national security, privacy, risk management, and financial inclusion. National security, she said, is an example unfolding right now, as Ukraine has managed to tap into digital currencies as residents attempt to flee. Being able to escape a war zone without having to queue at an ATM, she noted, is a real and tangible humanitarian application of digital currency.

When it comes to risk management, she said, the United States already has a strong, secure, government-backed financial system that lends legitimacy through disclosure requirements. This establishes a solid foundation for a CBDC, as well as a starting point for measuring and managing risk from a regulatory perspective. As other powerful players like Russia and China attempt to lead the digital currency ecosystem, a CBDC also provides the ability to track and manage potential risks.

In this sense, Lassiter also sees a chance to “perpetuate” the US dollar in its current value and secrecy. While she considers privacy the most difficult part of establishing a CBDC, she acknowledged that there is an opportunity to build privacy into technology and decide who can see transaction details.

The developing nature of CBDCs also offers a chance to establish greater financial inclusion. Creating a whole new currency with universal access – and even a whole new financial ecosystem – means it’s also crucial to be honest about what financial inclusion looks like now, who has access and engages with the system. and which has historically had a voice in its establishment. As ecosystem professionals troubleshoot and try to figure out what a CBDC might look like, she said, it’s critical to work with people who aren’t fully participating in the current financial system.

“Don’t design for your users,” Lassiter said. “It seems so simple, but design with them, understand how they want to use it, how they might use it, how they plan to use it. What is their relationship with money? do financial systems integrate?

The creation of a CBDC also goes hand in hand with issues of broadband accessibility and technology deserts, which DC and the current administration are working to address through legislation.

“It can’t be the same people who testify before Congress and the same people who sit on these panels,” Lassiter explained. “We need to have diversity and perspective because we are building something that is so much bigger than any person or entity.”

How can we get there?

This year has already given the movement for a central bank digital currency strong momentum. Last month, the President Joe Biden signed an executive order on digital assets and notably noted the need to take a closer look at the creation of a CBDC. The order encourages research and development of a CBDC, including assessing technology infrastructure and capacity needs and developing a potential plan from the Federal Reserve. In January, the Federal Reserve Board published an article on the pros and cons of creating a CBDC. the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology Digital Currency Initiative are also working on Hamilton Projecta research project exploring the CBDC design space and potential challenges or opportunities.

Lassiter predicts that the conversation will then hit Capitol Hill, with the creation of formal legislation to advance the development and research of CBDCs. For that to happen, she needs to submit her thoughts to the feds (in particular, she noted that the comment period for the Federal Reserve paper ends May 10 and that Project Hamilton wants technologists to test its security by trying to hack the program).

“There are technologies that will support and thrive in this space that we don’t even know yet,” Lassiter added. “That’s the really exciting part, which is: how do we draw the right boundaries and create the right environment, so that we do this kind of innovation in a responsible way?”

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Sylvia B. Polson