Proponents of central bank digital currencies are under pressure to demonstrate the economic benefits of their projects before they can counter China's digital yuan.
Both the European Union and U.S. face pressure to digitize their currency because of China's relatively faster progress on a
There's also a concern that the digital yuan could be a means of surveillance — this worry prompted U.S. Sens. Marsha Blackburn, R-Tenn.; Roger Wicker, R-Miss. and Cynthia Lummis, R-Wyo., to ask the U.S. Olympic and Paralympic Committee to bar American athletes from using the digital yuan during the summer games. A more bipartisan
In a hearing on Tuesday, Sen. Mark Warner, D-Va., warned: “I tell you CBDCs, it’s coming. If China ends up with the default mobile payments system … and then the default currency becomes a digital yuan, I think the panel is dramatically underestimating the potential threat that poses in terms of China's overall plan of technology dominance.”
Despite this sense of urgency, legislators have struggled to agree on matters as simple as who would approve a central bank digital currency — let alone what the CBDC would do.
"When people say 'CBDC' they are thinking about different problems and different use cases," Kelley said. "There isn't a clear consensus at this point. And much greater clarity is needed on what the benefits and risks are."
Legislative affairs
The European Parliament and the U.S. Congress will likely need to vote to establish their respective central bank digital currencies. But it's still not clear who will vote, when they will vote, or what they will vote on.
In the U.S., Federal Reserve Chair Jerome Powell, who has advocated for a gradual approach to developing a digital dollar, has
In a
The Fed's work is focused on a digital dollar, stablecoins and cryptocurrency, with Powell suggesting in a recent hearing that
U.S. Sen Sherrod Brown, D-Ohio, recently called on the
The Governing Council of the
EU academic research has determined that a digital euro could work within a real-time payment scheme such as the Eurosystem TARGET Instant Payment Settlement (TIPS), and the volume of transactions would not harm the environment. (Some activities adjacent to digital currency, such as
A separate European experiment involving
Jason Blick, CEO of EQIBank, a Dominica digital bank, is not certain TIPS has the bandwidth to support limitless digital euro transactions, a problem that may require regulations that constrict the digital euro or a complex technology project to upgrade the EU's real-time payment rails. Since CBDC digital wallets will need to effectively integrate into the instant payment settlement system, Blick said there could be limits in the amount of digital euros that can be in digital wallets, with excess amounts deposited in a traditional bank account.
"This limitation materially restricts the innovation of digital euro and represents an uneasy balance of economic viability and political ambition," Blick said, adding his firm still projects a digital euro will result in up to euro 400 billion in economic growth and 2 million jobs within the EU. "The move to a digital euro will add an array of unique benefits to retail customers including simplifying and streamlining payment rails and meeting a policy objective of inclusion and accessibility," Blick said.
The European Central Bank did not return a request for comment. In a statement on the ECB's website,
"A digital euro would reduce the cost of transactions," Panetta said. "It would foster financial inclusion by aiming to make digital payments available to those who currently don't have access to financial services."
Private sector
Legislatures are divided on the role of private-sector companies, including banks. Liberal-leaning legislators favor a more direct connection between central banks and consumers. Conservatives, who see CBDCs as a threat to banks, are pushing for banks to have a greater role.
Private stablecoins such as the pending Facebook-affiliated Diem and Circle's USDC are also pushing governments to develop digital currencies. These stablecoins have raised concerns over negative impacts on central bank monetary policy.
"This EU move signals the ECB’s intent to keep control over the euro as a medium of exchange. In the last few years, we have seen stablecoins growing in importance," said Yves Longchamp, head of research at SEBA Bank, a Swiss bank that specializes in transferring funds between digital and traditional currency. "From a central bank point of view, privatization of coin issuance by unregulated entities is a direct threat to the central bank privilege of being the sole entity to issue domestic legal tender."
While Powell has downplayed the idea that the potential digital dollar is an answer to the digital yuan, some members of Congress are pushing a more
"Some of our senators are very concerned regarding China’s CBDC, especially regarding privacy, and its potential spread of the CBDC’s mobile wallet into the U.S.," said Tim Sloane, vice president of payments innovation at Mercator Advisory Group.
The People's Bank of China recently released its own
A CBDC that has a chance to pass Congress will depend on the projects' architects making it clear why the currency is being digitized, according to the ETA's Kelley, adding there will also need to be evidence that these use cases don't adversely impact existing banking models, or that the benefits of a CBDC aren't possible via other government projects or bank technology.
There are also different types of CBDCs, which will need to be more clearly addressed, according to Kelley.
Among consumers, central bank digital currencies are popular. Sixty-four percent of adults in 10 countries, including the U.S. and nations in Europe and Asia, said they would likely use a CBDC, with 33% saying they would be very likely, according to research from the Estonian blockchain company Guardtime. Only 10% said they would never use a CBDC, it said.
"With central banks across the world working on digital currencies, it's natural to ask if they will unjam these global bottlenecks to our financial system, introducing truly seamless global flows of money and assets for both individuals and institutions," Luukas IIves, head of strategy at Guardtime, said in an email.
"For this to work, they will need to be interoperable with the rest of today’s financial plumbing and, across borders, with each other. But interoperability can only be achieved with infrastructure that is scalable and tokenized."
Any CBDC will need to work with digital currencies in other countries, a challenge given different regulations and payment structures across the
The
As in the United States and the European Union, the U.K.'s central bank digital currency is also developing slowly, partly due to the complexity of fitting digital money into financial systems that have been in place for
"With something that complicated that has real risk and real benefits, two years probably isn't that long," Kelley said.
MIT says there are numerous economic and policy questions that need to be addressed through extensive, separate policy progress that considers the limits of the technology. These limitations include how CBDCs fit into real-time payment schemes.
CBDCs will also need to demonstrate how they will fit in with other efforts to speed processing to accommodate digital commerce. There's some concern in Washington that a digital dollar could adversely impact the Federal Reserve's
There is even doubt as to whether any digital currency is necessary. Fed Vice Chairman for Supervision
The concern is that a CBDC could cause consumers to transfer funds out of traditional banks in favor of "Fed accounts," though it's likely that banks will play a role in disbursement given support for a
Neil Haggerty contributed reporting to this article.