AdobeStock_61981708.jpeg

PERSPECTIVES

Look out Venmo, CBDCs are on the way



We don’t often think of the government as driving innovation, but the Federal Reserve is working on a proposal that merges the accessibility of mobile payment apps with the verification powers of blockchain-like networks and, thus, could help bridge the gap between dollar-based fiat currency and crypto-based ethereal currency. If the initiative is successful, traditional banks could find themselves cut out of the lucrative online transaction process.

 

QUICK TAKES

  • Top 5 innovators in the private banking industry based on number of patent applications in Q1/2022: Bank of America (55), Toronto Dominion Bank (29), JP Morgan Chase (26), Ping An Insurance Group (24), CME Group (17), Wells Fargo (17). (GlobalData)

  • 92% of Chinese use fintech for banking and payments compared with 52% of Americans. (TransUnion)

  • The fintech sector attracts about $50 billion in investments every year. (Intellius)

 

An article in Popular Science explains that people would be able to use the proposed central bank digital currency (CBDC) to instantly send funds to any party — whether personal or business — through their existing financial accounts, without transaction fees. The transaction would be routed directly through the Fed, bypassing current banks and payment systems.

CBDCs involve an encrypted computer code that authorizes each transaction, allowing simulated cash to be drawn from a person’s virtual wallet and re-created in the recipient’s. A database then validates and records the activity to create a permanent, transparent ledger that the sender, the recipient and any authorizers can look back on. The Federal Reserve would stabilize the value of the CBDC, avoiding the type of volatility that’s common with cryptocurrencies.

Several countries, including China, India, and Jamaica, are already experimenting with CBDCs. But the lack of anonymity with government-run ledgers could hinder acceptance in the US. William Luther, an assistant professor of economics at Florida Atlantic University and director of the Sound Money Project, a financial stability and privacy research group, is quoted in the article as noting: “With cash you have a lot of privacy, so long as no one sees it trading hands. Digital currencies always link back to your [online] identity.”

Still, with a government executive order in March calling for more research on a secure CBDC, Luther thinks the technology will probably be a nationwide option soon. “Depending on how quickly Congress and the president want to roll it out, an American digital dollar could be launched in the next two years,” he says.