The U.S.-based Digital Dollar Project this week announced plans to launch a series of pilot programs to explore uses of a U.S. central bank digital currency (CBDC), or “digital dollar.” The private sector-led initiative is the first of such efforts in the U.S., whose government has repeatedly indicated that it was in no hurry to embrace one.
“The U.S. doesn’t need to be first to the central bank digital currency, but it does need to be a leader in setting standards for the digital future of money, which is why our pilot testing collaboration with Accenture and other partners is so critical,” said J. Christopher Giancarlo, former chairman of the U.S. Commodity Futures Trading Commission and co-founder of the Digital Dollar Foundation.
At least five U.S. CBDC pilot programs will be launched over the next 12 months, according to a joint announcement by the Digital Dollar Project, a partnership between Accenture, the information technology consultancy and the non-profit Digital Dollar Foundation, a public education and advocacy group to explore use cases for a digital dollar.
“We need to better understand how to balance the complex issues of a CBDC and how to incorporate key societal values, like privacy rights, financial inclusion and rule of law,” Giancarlo said.
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Digital Dollar Project’s objectives
The digital dollar pilots aim to identify technical and functional requirements, assess benefits and challenges and explore potential uses for retail and wholesale commercial applications of an American CBDC. The Digital Dollar Project plans to share the results of the pilots with the public and the U.S. Congress, and its efforts are intended to complement the concurrent CBDC research and other work by the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology.
“Initiatives like the Digital Dollar Project are a much-needed step in the right direction as they will galvanize local communities, increase knowledge and understanding, and help identify the best path forward in terms of CBDC utilization and adoption,” said Sky Guo, co-founder and CEO of Cypherium, an enterprise-focused blockchain platform, in an email to Forkast.News. “As the first-mover, the Digital Dollar Project is in an advantageous position to increase their footprint and really become a national think tank that drives CBDC adoption forward.”
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Interest in central bank digital currencies — general-purpose CBDCs for use by the general public and wholesale CBDCs for use in financial markets — has been growing around the world, with countries in different levels of CBDC development, from exploratory research to testing to launch.
A recent survey of central banks conducted by the Bank for International Settlements found that 86% were exploring CBDC issuance and about 60% were conducting a proof of concept. Last fall, the Bahamas became the first nation to launch a CBDC with its “Sand Dollar.”
Among the world powers and major countries, China is, by all accounts, leading the CBDC race with its mass and ever-larger public trials of the digital yuan. While there is no official launch date yet for China’s “Digital Currency, Electronic Payment” (DCEP) project, China watchers believe it could coincide with the Beijing Winter Olympics in February 2022. Last month, Chinese banks — the Bank of China (BOC) and Industrial and Commercial Bank of China (ICBC) — unveiled prototype automated teller machines for foreigners to try out the digital yuan.
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While the U.S. has repeatedly indicated that it is in no hurry to launch a digital dollar, Asia — from China to Japan, Korean and Southeast Asia — has been powering ahead with a flurry of CBDC domestic and multilateral initiatives.
What is the U.S. stance on an American CBDC?
“Far more important to get it right than it is to do it fast or feel that we need to rush to reach conclusions because other countries are moving ahead,” said U.S. Federal Reserve chair Jerome Powell at a press conference last week, reiterating a theme from his previous public remarks on the prospects of a digital dollar. “The currency that’s being used in China is not one that would work here. It’s one that really allows the government to see every payment that’s used for which it is used in real time.”
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It is not the first time that Powell has expressed the U.S.’ cautious approach over the idea of a digital dollar. At the opening session of the inaugural BIS Innovation Summit 2021 in March, Powell said: “Because we’re the world’s current principal reserve currency, we don’t need to rush this project and we don’t need to be first to market. A dollar CBDC would have potentially large implications here and around the world, and we’ll be sure to think carefully about all of that and engage very broadly with the public around the world, in particular here in the United States before we even approach a decision.”
“We’re sort of purveyors of stability — macroeconomic stability, price stability, financial stability,” Powell said. “We have a two-tier system: central banks interface with banks, banks interface with the public. And we do not want to destabilize that.”
China says its goal is not to replace the U.S. dollar or any other international currency, according to Li Bo, deputy governor of the People’s Bank of China at the Boao Forum last month. “Our goal is to allow the market to choose and to facilitate international trade and investment.”
But China watchers believe that China’s DCEP has the potential, eventually, to topple the U.S. dollar as the world’s most powerful currency international trade and finance.
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How CBDC development is different in Asia
Unlike the private-sector-led Digital Dollar Project in the U.S., in Asia, it is governments that are the prime movers behind CBDC developments.
Japan, while saying it has no plans as of yet to issue a CBDC, is currently conducting a proof of concept for a general purpose CBDC.
“Central banks share the view that it is not an appropriate policy response to start considering CBDC only when the need to issue CBDC arises in the future,” said Bank of Japan governor Haruhiko Kuroda, in a speech at the FIN/SUM 2021 conference in March.
South Korean’s Shinhan Bank, one of the oldest banks in the country, recently announced that it had developed a pilot of a blockchain-based CBDC platform for retail use with conglomerate LG Corp. in preparation for a potential Bank of Korea-issued CBDC.
Hong Kong, in its Project Aurum, is exploring a hybrid CBDC as well as private CBDC-backed stablecoins. A hybrid CBDC provides for direct claims on the central bank while allowing intermediaries such as banks to handle payments. A stablecoin is a cryptocurrency that is designed to minimize price volatility by pegging to a more stable asset such as fiat currency.
Thailand, too, is exploring a retail CBDC and is in the midst of a public consultation exercise. According to the Bank of Thailand, its “key motivation in exploring a retail CBDC rests on the assumption that privately-issued digital currencies could become widely adopted and systemically important in Thailand. If such a scenario occurs, users may be at risk and the nation’s financial and monetary stability as well as the integrity and safety of payment systems could be challenged.”
The CBDC initiatives are also increasingly going cross-border as central banks pilot global multilateral projects for wholesale CBDCs.
The central banks of China, Hong Kong, Thailand and the United Arab Emirates announced in February that they were collaborating on a “Multiple CBDC Bridge” project for cross-border payments, an expansion of an earlier Project Inthanon-LionRock wholesale CBDC initiative between Thailand and Hong Kong.
Singapore, which completed its multi-year multi-phase Project Ubin project that explored the use of blockchain and distributed ledger technology for clearing and settlement of payments and securities last year, has now embarked on Project Dunbar, a multilateral multi-CBDC wholesale settlement project.
Some of the experimentation has also moved to commercialization, with the private sector taking the lead. Following the development of a payments network prototype from Project Ubin, Singapore’s DBS Bank, J.P. Morgan, and state-owned investment company Temasek announced last week that they have formed a technology company, Partior, to develop a blockchain-based multi-currency payments network for commercial cross-border payments and settlements, which can also handle CBDCs.
“With its genesis from Project Ubin, a public-private partnership on blockchain and CBDC experimentation, Partior is a pioneering step towards providing foundational global infrastructure for transacting with digital currencies in a trusted environment, spurring a wide range of use-cases in the blockchain ecosystem,” said Sopnendu Mohanty, chief FinTech officer at the Monetary Authority of Singapore.
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