Seven Myths About Central Bank Digital Currencies

By Nasreen Quibria

Separating fact from fiction on central bank digital currencies and a possible U.S. digital dollar can be challenging. In the latest edition of our Digital Dollar Digest series, ICBA is here to help dispel any misconceptions and debunk the most common myths.

Myth 1: The Federal Reserve will issue a U.S. digital dollar.

No decision has been made yet on a U.S. central bank digital currency, or CBDC. But if the U.S. moves forward with a CBDC, the Federal Reserve will need legal authority from Congress, as Fed Chairman Jerome Powell has said. Federal legislation is required to establish the roles and responsibilities of the various stakeholders—including the Treasury Department, Fed, and private sector—and consider their part in the design, security, issuance, distribution, and support for a CBDC.

Myth 2: The U.S. is far behind in CBDC research.

Some CBDC advocates are clamoring for the Fed to rush a digital dollar, afraid the U.S. is falling behind global adversaries like China. Others see an urgency to address the growing systemic threat posed by private digital assets working on the fringes of the financial system.

Far from being a laggard, the Fed began investigating a CBDC as far back as 2016 and became more active last year. The Federal Reserve Board established a lab, while the Federal Reserve Bank of Boston, in collaboration with MIT, built and tested a hypothetical digital currency, the results of which are expected soon.

Myth 3: A CBDC is a panacea for financial inclusion.

U.S. digital dollar backers say it would provide a public good that will enable the unbanked to participate in formal financial services. However, unbanked individuals’ trust issues, preference for cash, and lack of broadband access could impede adoption goals.

Myth 4: A U.S. digital dollar will collect a lot of personal data.

There is concern that a U.S. digital currency could collect extensive personal data. While the Fed already has access to vast amounts of data from ACH, wire, and check transactions, it has indicated data privacy would be an important policy goal for a U.S. CBDC. 

Other central banks that have launched or are exploring CBDCs are aligned with the U.S. vision for limiting data capture and enhancing privacy. The European Central Bank’s Fabio Panetta has said the ECB has no commercial interest in user data and has been testing a digital euro that detaches a person’s identity from their payments.

The Bahamas, which launched the first national digital currency, has taken a tiered approach to segregate digital wallets. The lowest tier does not require strict know-your-customer (KYC) and anti-money-laundering requirements, though it limits the amount of national digital currency that may be held. The other two tiers use a risk-based approach to KYC associated with amount limits—an approach the U.S. may consider emulating.

Myth 5: A CBDC will harm community banks.

While the launch of a national digital currency could affect the community bank business model, it also could provide opportunities for community bank innovation.  

If a CBDC were to decrease deposit funding available to community banks, it would weigh on bank profitability and credit extension. However, central banks recognize the vital role of commercial banks in the financial system, and the degree of impact may be mediated based on policy and design decisions, as highlighted by the Bank for International Settlements.

Community banks focused predominantly on payments are vulnerable to continuing threats to its financial structure (from “buy now, pay later” schemes eroding card volumes to crypto exchanges taking consumer direct deposits) and should be prepared for the evolving digital era. While a future digital dollar could present some risks, it could also provide new avenues for business transformation.

Myth 6: A U.S. CBDC will mean FedAccounts for all.

Broadly establishing FedAccounts—in which the public could deposit, store, transfer, and withdraw money directly with the Fed—would require substantial new infrastructure and transfer massive technological and operational risk to the central bank. The Fed is not equipped to function like a retail bank. Instead, the Fed would more likely adopt a private-public partnership model to distribute CBDC to the public.

Myth 7: A CBDC is built on blockchain technology.

While some global CBDC projects use distributed ledger technology, or blockchain, as the underlying technology in the pilot or production phase, it isn’t a requirement. Advanced economies are finding blockchain technology presents issues of immaturity, performance, and scalability. The People’s Bank of China, which is further along, ultimately used a conventional centralized structure for its core system. However, China is exploring using blockchain in other ways, such as for issuing CBDCs and for cross-border transactions.

As more details become available, ICBA will continue to monitor CBDC developments to help educate community bankers on this emerging payments technology, keeping you informed about the digital dollar’s potential benefits and risks. Please contact me at [email protected] with your views to help ICBA best position community banks on a future U.S. digital dollar. 

Meanwhile, stay tuned for the next installment of the Digital Dollar Digest as we explore more issues with the future of money.

Nasreen Quibria is ICBA vice president of emerging payments and technology policy.

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