Regulatory Environment Still Uncertain for CBDCs

The regulatory environment is taking shape for central bank digital currencies (CBDCs) — but there’s hardly a clear-cut path forward, at least here in the states.

A number of key questions still bubble up.

How should central banks — and, especially, the Federal Reserve — issue and monitor these digital currencies? What would the role of the traditional banking players be — and would the CBDCs be used for retail or wholesale payments, or both?

Much may be laid out (and some questions may remain unanswered) when the Fed published its own paper on CBDCs, but depending on where you look, the regulatory ball, so to speak, is rolling.

To that end, there’s at least some pressure not to cut out intermediaries from the process.

As laid out in recent days via proposed legislation from Minnesota Republican Congressman Tom Emmer, the Federal Reserve would be prohibited from issuing a central bank digital currency directly to individuals. That prohibition would come via an amendment to the Federal Reserve Act, extending section 13 to ban the Federal Reserve from offering products or services directly to an individual, maintaining an account on behalf of an individual or issuing a CBDC directly to an individual.

Read here: Congressman’s Bill To Ban Fed’s CBDC Will Heat Up Debate

So: In this case, there would ostensibly be a CBDC, but data privacy concerns remain paramount. Emmer’s bill would seek to prevent the central bank from also becoming a retail bank. As the congressman contended last week in a statement, “requiring users to open up an account at the Fed to access a U.S. CBDC would put the Fed on an insidious path akin to China’s digital authoritarianism … It is important to note that the Fed does not, and should not, have the authority to offer retail bank accounts. Regardless, any CBDC implemented by the Fed must be open, permissionless, and private. This means that any digital dollar must be accessible to all, transact on a blockchain that is transparent to all, and maintain the privacy elements of cash.” The statement that the CBDC must be open and private leaves room for traditional financial players in the mix.

Wholesale, Retail or Both 

Then, of course there’s the debate over whether the CBDCs should be offered up for retail or wholesale use cases, or both. We’ve seen a hybrid approach in China, of course, where in recent weeks the central bank of that country has launched apps that would bring CBDCs/wallets to Google and Apple online stores; a range of pilots across the country have incorporated wholesale and retail payments ahead of a broader rollout that targets the 2022 Olympics.

Interestingly, and as noted by CNBC on Tuesday (Jan. 18), the digital yuan has logged $8.2 billion in transactions in the past six months, far outpaced by apps such as Alipay. The People’s Bank of China has estimated that more than 260 million individuals have digital wallets in place to accept and use the digital currency.

There seems to be, already, a desire for businesses to adopt, and adapt to, digital currencies, particularly for wholesale payments. PYMNTS’ own research shows that 58% of multinational firms are using cryptocurrencies; about a third of those companies use stablecoins, which we note might make a natural segue into using CBDCs.  Recent tests have found that CBDCs can cut cross-border settlement times and costs.

Read also: Study: 58% of Multinational Firms Use Cryptocurrencies

None of this is to state that cryptos would be edged out entirely — though of course, in some nations (China and India among them), there have been widespread crackdowns on bitcoin and other cryptos.

Interestingly, there may be some natural gravitation away from cryptos due to macro concerns as CBDCs gain ground and also as interest rates rise, perhaps setting the stage for wider embrace of CBDCs.

A report by Morgan Stanley, relayed by Coindesk, stated that crypto markets are weakening as central banks look to hike rates, among other activities, bank’s head of cryptocurrency research, Sheena Shah, wrote in a report published last week.

There’s still no broad consensus on CBDCs, or even where they would exist, which raises basic questions about interoperability. In the U.K., for example, a committee in the House of Lords has found there’s no real reason to issue CBDCs. Many other central banks are still in the research stage. Only smaller economies, such as Barbados, have come fully to launch with their own CBDCs, but of course China waits in the wings — and may light a fire under the rest of the world’s major economies.