Technology
Developing US Central Bank Digital Currency Will Take Years – Yellen Says
The US administration recently pushed to review policy about digital assets, including cryptocurrencies, and has also staked out its broad view of central bank digital currencies - a controversial area.
Developing a central bank digital currency (CBDC) could take
years to pull off successfully, and policymakers must realize
that the most vulnerable citizens suffer when regulations don’t
keep pace with innovation, US Treasury Secretary Janet Yellen
said yesterday.
CBDCs are digital tokens, similar to cryptocurrency, issued by a
central bank. They are pegged to the value of that country's fiat
currency. These are distinct from apolitical cryptocurrencies
such as bitcoin, often criticized by policymakers for being
conduits for dirty money and as a potential threat to established
state money.
Yellen said the US welcomed innovation for managing and using
digital assets – with certain caveats. A few weeks ago, the Biden
administration ordered federal agencies to work in unison to
draft cryptocurrency regulations, the first executive order
issued about the space. The US has pegged the cryptocurrency
market as worth a market cap of $3 trillion, as of last
November, surging from $14 billion five years’ earlier. Yellen's
comments came after the Bank for International Settlements, based
in Basel,
weighed in on the CBDC issue.
“I don’t yet know the conclusions we will reach, but we must be
clear that issuing a CBDC would likely present a major design and
engineering challenge that would require years of development,
not months. So, I share the President’s urgency in pulling
forward research to understand the challenges and opportunities a
CBDC could present to American interests,” Yellen said.
She said the US financial system has benefited from “responsible
innovation,” giving examples such as ATMs, credit and debit
cards. She accepted that many financial transactions still take
too long to settle.
“A combination of technological factors and business incentives
have produced a common frustrating experience shared by tens of
millions of Americans every week: their employer sends their
paycheck, but it takes up to two days for the check to hit their
bank account. The delay contributes to the use of high-cost check
cashers or ‘pay day’ lenders to get their money in time to pay
their bills. Some are forced to draw against already low balances
and are charged overdraft fees. Estimates suggest Americans spend
$15 billion or more each year on such fees and services –
essentially a tax of about $100 dollars per working American, due
mostly to inefficiency, and disproportionately borne by people
with lower incomes,” she said.
“Proponents of digital assets envision a more efficient payment
system with instantaneous transactions and lower costs no matter
where you live. Will the technology live up to that promise? I
think it’s too early to tell. Issues like processing time, cost,
and technological barriers to access will need to be overcome,”
Yellen continued.
“The US is actively involved in the work of the G20 to address
challenges and frictions with cross-border funds transfers. And,
in 2023 the Federal Reserve plans to launch FedNow, an instant
payment service that will enable payment in real time, around the
clock, every day of the year within the US' payments
system."
On CBDCs, she noted that “some have also suggested” they could
“contribute to a more efficient payment system.”
The Biden administration is to publish a report on the future of
money and payments, analyzing a possible CBDC design.
But Yellen warned: “Innovation that improves our lives while
appropriately managing risks should be embraced. But we must also
be mindful that `financial innovation’ of the past has too often
not benefited working families, and has sometimes exacerbated
inequality, given rise to illicit finance risks, and increased
systemic financial risk.”
Lessons from the financial crash
She went on to warn that the financial crash of 2008 caused
financial distress for the poorest in the US, and added: “We need
to ensure that the growth of digital assets does not allow
similarly dangerous risks to emerge or lead to disproportionate
impacts to vulnerable communities.”
“Already, the Treasury has worked with the President’s Working
Group on Financial Markets, the FDIC, and OCC to study
stablecoins, a type of cryptocurrency pegged to a stable source
of value, often the US dollar. Stablecoins raise policy concerns,
including those related to illicit finance, user protection, and
systemic risk. And, they are currently subject to inconsistent
and fragmented oversight,” Yellen said.
“To peg their stablecoin to a dollar, most issuers say they back
their coins with traditional assets that are safe and liquid.
This way, whenever you want to trade your stablecoin back into a
dollar, the company has the money to make the exchange. But,
right now, no one can assure you that will happen. In times of
stress, this uncertainty could lead to a run.”
Yellen said a stablecoin run occurred in June 2021, when a sharp
drop in the price of the assets used to back a stablecoin set off
a negative feedback loop of stablecoin redemptions and further
price declines.
“Our regulatory frameworks should be designed to support
responsible innovation while managing risks – especially those
that could disrupt the financial system and economy. As banks and
other traditional financial firms become more involved in digital
asset markets, regulatory frameworks will need to appropriately
reflect the risks of these new activities. And, new types of
intermediaries, such as digital asset exchanges and other digital
native intermediaries, should be subject to appropriate forms of
oversight,” she said.
“Wherever possible, regulation should be `tech neutral.’ For
example, consumers, investors, and businesses should be protected
from fraud and misleading statements regardless of whether assets
are stored on a balance sheet or distributed ledger. Similarly,
firms that hold customer assets should be required to ensure
those assets are not lost, stolen, or used without the customer’s
permission. And, taxpayers should receive the same type of tax
reporting on digital asset transactions that they receive for
transactions in stocks and bonds, so that they have the
information they need to report their income to the IRS,” Yellen
said.
The tech neutrality approach also applies to issues such as tax
evasion, illicit finance, and national security, she added.