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The U.S. is starting a national conversation about a central bank digital currency, while more than 60 central banks have been looking into CBDCs since 2014.

Several countries worldwide have experimented with digital currencies or already released early versions of CBDCs. Such a turn could make banking and monetary policy more efficient and help the financial inclusion of the population.

On Wednesday, the Senate Banking Committee, led by Sen. Elizabeth Warren, held a hearing on CBDC dedicated to building a stronger financial system, at the time as the Federal Reserve is planning to release a discussion paper next month on its vision of a digital dollar.

The CBDC will initially be the digital version of the dollar, so its value wouldn’t fluctuate against the dollar. Since a CBDC is just a digital version of an existing currency, that is, unlike Bitcoin, issued, governed, and backed by a central bank, it would be recognized as legal money.

A CDBC would allow more people to become a part of the banking system, reduce its cost to banks, and increase the pace of payment innovations.

Also, the Federal Reserve could collect more accurate information about the money supply, so lawmakers could more precisely distribute government assistance programs to a wider underserved group of the population, such as social security and food stamps.

Also, a U.S. CBDC could aid support the global dominance of the dollar.

However, potential cons include the traceability of digital payments, which undermines privacy offered by the anonymity of cash. It would not come easy to provide security for financial data on hundreds of million people as well. Financial institutions are also concerned that banks could lose a large part of their deposit base.

According to Darrell Duffie of Stanford’s Graduate School of Business, who was at the Senate hearing, “CBDCs are ultimately quite likely for many countries.”

“I’m not confident that they are actually necessary — that needs to be judged based on the best CBDC designs that will emerge,” he adds.

Nevertheless, more than 60 central banks have been looking into CBDCs since 2014, according to a PwC report from April. The Bahamas and China have led their trials of the “Sand Dollar” and the “Digital Yuan,” that people can use as a form of digital cash. According to PwC’s review, the Federal Reserve has been studying digital currencies since 2018, but not as consistent as other central banks.

Although there is the general vision of a CBDC, countries are still facing hundreds of choices and decisions regarding how to build their digital financial systems and what the long-term effects will follow.

Most observers have assumed that CBDCs will be rather account-based than being token-based as major cryptocurrencies.

Lev Menand of Columbia Law School said his beliefs that the COVID-19 pandemic highlighted the inefficiencies and inequities of the current payment systems.

“It took far too long to distribute critical economic aid in April and May of last year,” he said.

Axios’ chief financial correspondent Felix Salmon reported, some experts are worried that criminals may have stolen unemployment benefits up to $400 billion during the pandemic.

While the expert remains skeptical regarding CBDC’s future. “Digital currencies are still in their infancy, despite Bitcoin being 10 years old. I wouldn’t expect to see a U.S. CBDC this decade,” Felix stated.


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