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Developing US Central Bank Digital Currency Will Take Years – Yellen Says

Tom Burroughes

8 April 2022

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.