As the world moves toward a more digital future, it comes as no surprise, reignited discussions of a digital dollar are in the news. With 10 countries already launching their own digital currency and more than 100 others looking into it, the U.S. is also having serious discussions about it. But where are we at? What does this mean? What does the future hold when it comes to a Central Bank Digitized Dollar (CBDC) and what do banks, businesses and consumers need to know?
Over the past two years, banks have fast tracked their digital capabilities and adopted more technologies to keep up with new societal demands. Whether that be blockchain, bank operating systems or other technologies and softwares – banks and financial institutions are looking at how they can digitize processes to become more efficient and streamlined than ever before.
Blockchain, for example, is now being tried and tested across multiple financial institutions, whether it be to speed up and simplify payments, increase security through connecting multiple data points, or improve infrastructure through the optimization of internal processes. The use of blockchain goes far beyond its commonly known use of enabling different cryptocurrency transactions. Needless to say, we’ve learned by now that the volatility of Bitcoin, among other non-regulated digitized tokens, has caused chaos for everyday investors and is ultimately heightening the need for a regulated coin.
Currently, the digital dollar is a topic of bipartisan conversation in the House of Representatives. And while many potential opportunities are being highlighted, we must equally evaluate the risks.
On one hand, there’s an argument that formation of a CBDC could create efficiencies in settlement and assist in stabilizing the challenges we’ve seen in stablecoin like Terra. On the other hand, it poses a threat to banks by directly competing with them. While CBDC may be facilitated through banks, if they sit on the Fed’s balance sheet, it may directly compete with the bank and impede the institution’s ability to lend. Let’s not forget that what makes the US economy so robust is the diversity in its banking system.
But, as U.S. regulators continue discussions, innovation in the private sector continues. Banks like ours, as well as many others across the country, are looking at ways to stay ahead of the curve when it comes to the demands of consumers and businesses. Take the USDF Consortium as an example, a membership-based association of FDIC-insured banks that ConnectOne Bank is a part of with 9 other community banks, all working to explore the opportunities to bring blockchain into the regulatory perimeter of banks.
The consortium will allow banks to facilitate the compliant transfer of value on the blockchain, removing friction in the financial system and unlock the financial opportunities that blockchain and digital transactions can provide to a greater network of users, while maintaining a secure environment. First, the USDF is not a stablecoin weighted against a number of securities, but rather a tokenized deposit that reflects a dollar in deposits held by the member bank. The ecosystem would live behind the walls of the bank’s rigorous KYC & KYB processes adding an added layer of security.
As Rob Morgan, CEO of the USDF Consortium states, “If policymakers want to realize the benefits of blockchain technology while maintaining critical protections, they should look to the bank regulatory framework. Bank deposits are backed by robust capital and are subject to a regulatory regime that ensures liquidity and solvency. For banks, the implementation of blockchain technology does not fundamentally change the nature of banking or how regulation controls for the risks associated with it.”
Now, what’s important to realize is that while governments around the world look to form their own central bank digital currency like the U.S digital dollar, pre-existing stablecoins such as USDF could co-exist alongside it. “It could even be complimentary”, said Federal Reserve Vice Chairwoman Lael Brainard in a previous House Financial Services Committee meeting. In this scenario, a wholesale CBDC could partner with USDF, maintaining the same two-tier structure that exists in the banking system today. This wholesale approach to the CBDC eliminates the deposit risks banks would face if CBDC took a retail approach.
Although Congress is grappling with the needs and actions of what’s to come, there is no simple answer to what we can expect from a digital dollar… In the meantime, we are making positive strides in having conversations related to digital assets that keep the safety and soundness of our banking system and consumers top of mind.
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