By: Bridget Harrington
Since the start of the COVID-19 pandemic, many retailers have been moving away from traditional methods of payment like cash or chip-enabled credit cards and toward contactless methods such as Apple Pay. Some retailers have even begun accepting cryptocurrencies such as Bitcoin as payment for their goods or services. Services like Apple Pay are backed by a user’s credit card, but generally, cryptocurrencies are not directly tied to any currency. That difference puts these types of virtual currency at high risk for volatility. But in recent years, there has been a push around the world for a new, more stable type of digital currency which could soon surpass all these other payment methods: central bank digital currencies (“CBDCs”).
A CBDC is a digital token issued by a country’s central bank. Like traditional cryptocurrencies, they may be partially based on blockchain technology, but this is not a requirement. And while they may appear similar and be used in a similar fashion to traditional cryptocurrencies, CBDCs act as legal tender with a value mirroring the country’s physical currency rather than reflecting the sentiments and interest of consumers. Essentially, a CBDC is a digital version of the physical currency. At present, eight countries in the Caribbean, as well as Nigeria, have launched their own CBDC. India has plans to launch a digital rupee by the end of 2022, and China has already begun trials of the digital yuan. Research into CBDCs is ongoing in the United Kingdom, European Union, and the United States. However, the United States Department of the Treasury has not yet taken a stance on whether the U.S. plans to introduce its own CBDC, and think-tank Atlantic Council believes that the U.S. is the furthest behind of the world’s leading central banks in making a digital version of the US dollar publicly available.
The United States government’s reluctance at getting into the CBDC market presents an economic risk. In a world where the US dollar is dominant in the international market, lagging on this type of innovation creates the risk of the dollar becoming less convenient and therefore less widely used. As a CBDC is a tool with the potential for quick and low-cost transactions, falling behind on adopting one puts the US at an economic disadvantage compared to other countries. There are domestic financial risks as well, given that private financial institutions have a much higher risk of failing and costing consumers money more than a central, government-run bank.
But the concerns presented by the government’s issuing of a CBDC are many and have left the US government and consumers alike rightfully worried. Perhaps the most significant issue arising from its implementation would be how to balance consumer privacy and government regulation. While having a central bank issue a currency on a digital platform can make it easy to impose regulations and combat crime, there is always the risk that the government could use these platforms to monitor individual citizens. Currently, the Federal Reserve Bank of Boston, in collaboration with the Massachusetts Institute of Technology’s Digital Currency Initiative, is in the process of developing the technology to implement a CBDC, but it is facing the daunting task of weighing privacy and cybersecurity interests with other technological and policy-based interests.
Concerns about the scope of the Federal Reserve’s authority as the US’s central bank to issue accounts to the individual have also arisen for those worried about the risk of government overreach and its impact on private institutions. The Fed’s recent report on the subject posits that a potential model to avoid the direct issuance of accounts would be to cede that role to private institutions, allowing them to facilitate transactions and funds management. Along with implementing mitigating regulations like limitations on a user’s ability to earn interest on CBDCs or hold them beyond a certain dollar threshold, the Federal Reserve could prevent a collapse in some private financial institutions when a CBDC goes public.
There are undeniable risks associated with introducing any national digital currency; the Federal Reserve recognizes it may not have even considered all angles and is seeking public feedback. However, by choosing to create its own CBDC, the United States would be assuming a similar level of risk to every other country and region which is doing the same, which presently totals around 90 countries, including some of the biggest world economies. The risk posed to the value of the US dollar and the US’s role in international trade is comparatively greater than the risk posed by implementing a CBDC. While the US may currently be behind several large economies in its digital currency development, the federal government would be well-served by observing the progress in domestic institutions like the Federal Reserve Bank of Boston, as well as the rollout in other countries, and preparing for its own implementation. Congress should be considering what the technological, regulatory, and economic framework should look like, well before the Federal Reserve takes steps toward launching such a program. By taking proactive legislative steps, the United States could closely follow the inevitable introductions by other economic powerhouses, and even take a leadership role in ensuring privacy and economic stability through CBDCs.
Student Bio: Bridget Harrington is a second-year law student at Suffolk University Law School. She is a staffer on the Journal of High Technology Law. Bridget received a Bachelor of Science Degree in Accounting and Finance from the University of Massachusetts Dartmouth.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
