In January, the U.S. Federal Reserve Board released a discussion paper on a potential U.S. central bank digital currency (CBDC) titled “Money and Payments: The U.S. Dollar in the Age of Digital Transformation.” The comment period for the article ended on May 20, and the Fed received over 2,000 pages of comments from individuals along with responses from key stakeholders.

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Cryptooshala read a compilation of shareholder responses to the Fed’s paper, and it quickly became apparent that there were many strong voices, but little agreement among them. The main points of contact are in places where they are all perplexed.

The Fed wants to know

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In keeping with its purpose, the Fed paper provides a broad overview of central bank digital currencies and related topics related to CBDC without much depth. The discussion begins with the results of previous analyzes that determined that a US CBDC would perform best if it was privacy-protected, mediated, widely shared, and verifiable. The potential uses, benefits, and risks of the American CBDC are discussed next. Stablecoins and cryptocurrencies are briefly mentioned, and 22 questions are proposed for discussion.

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The paper also reviews current developments in the field of electronic money. For wholesale, FedNow is expected to enable 24/7 real-time interbank payments starting in 2023. Meanwhile, Private Banking Initiative and other programs are seeking to expand financial inclusion by promoting low-cost banking for those who are unbanked and underserved.

Shades of Neutrality

One thing missing from stakeholder comments studied by Cryptooshala is neutrality. An exception in this respect is the response from the Institute of International Finance.

The IIF is a global financial industry association with over 450 members from over 70 countries. It includes commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks and development banks.

IIF answered all 22 questions proposed by the Fed while remaining agnostic about the merits of establishing a US CBDC.

“Such a decision deserves serious consideration, so the IIF wanted to be very constructive in its presentation to support the Fed’s ability to evaluate the pros and cons,” Jessica Renier, IIF managing director of digital finance, told Cryptooshala.

The IIF answer is not impartial. It lists 12 policy considerations that the authors believe must be addressed before a CBDC can be launched, including environmental issues that the Fed did not mention. He offers practical suggestions on validators and other technical issues and tries to highlight the need for private sector participation in a retail CBDC.

“The business model has to work,” Renier said. “If the risks outweigh the incentives, you can only engage intermediaries that depend on selling user data, such as technology firms. It’s not good for consumers.” She added:

“If the Fed goes ahead, it needs to work closely with banks to understand the real impact on their ability to lend and test the real performance of a potential CBDC.”

The Securities Industry and Financial Markets Association represents securities broker-dealers, investment banks and asset managers, advocating efficient and sustainable capital markets.

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His lengthy, detailed answer doesn’t talk about the desirability of introducing CBDCs, but rather focuses on settlements and payments between financial institutions. noting that “U.S. capital markets finance 73 percent of all economic activity in terms of equity and debt financing of nonfinancial corporations.”

Programmability and interoperability are key concerns for SIFMA and it states that “the many benefits […] often associated with wCBDC [wholesale CBDCs] do not depend on wCBDC; they can be developed using other payment infrastructure such as stablecoins or settlement tokens using a distributed ledger infrastructure.”

“Let Me Do It”

Some commentators have made their position clearer. The National Association of Credit Unions responded to the Fed article with a letter. CUNA has taken a stand against the US CBDC elsewhere, and while its wording in the response is diplomatic, its skepticism is clear. “Given that the vast majority of U.S. payments are already made through digital channels, the Fed should be clear about the problem(s) it is trying to solve,” the letter said. states.

Moreover, CBDCs represent potential competition for deposits from credit unions. “If credit unions lose access to significant deposits and have to invest heavily in new technology and CBDC wallet development, the benefits they can provide to their members will inevitably suffer.”

The creation of the CBDC will inevitably lead to the movement of funds from banks to the Fed. states The American Banking Association, in its comments, estimated that 71% of bank funding could be at risk of displacement. Furthermore:

“The introduction of CBDCs could undermine the important role of banks in financial intermediation.”

This is just the beginning of a long list of possible misfortunes. The ABA comments said the CBDC would exacerbate the stress event and likely make monetary policy transmission more difficult. “As we assessed the likely implications of issuing a CBDC, it has become clear that the perceived benefits of a CBDC are uncertain and unlikely to be realized, while the costs are real and acute,” the ABA concludes. It further suggests that stablecoins would be a better option.

Bank Policy Institute commented similarly: “To the extent that CBDC may provide one or more benefits, those benefits could probably be achieved through less harmful means.”

Circle Internet Financial, the issuer of the USD Coin (USDC) stablecoin, also makes the case for the superiority of stablecoins over CBDC in its response to the Fed’s paper, not surprisingly.

Marriner S. Eccles Federal Reserve Board Building in Washington, D.C. Source: AgnosticPreachersChild.

“Many companies, including Circle, have used blockchain technology to support trillions of dollars of economic activity with fiat-pegged stablecoins,” the response reads. is reading. “The introduction of a CBDC by the Federal Reserve could have a dampening effect on new innovation that could otherwise make the U.S. economy and financial sector more competitive both domestically and internationally.”

Circle answered selected questions put forward by the Fed, focusing on comparing CBDCs and stablecoins.

On the other hand, there is a lot of enthusiasm for the response of the US CBDC in the enterprise blockchain company nChain, which the company provided to Cryptooshala. The authors write:

“While some of the potential benefits of a CBDC may be reapred by the private sector (albeit with credit and liquidity risk), there are social, operational and geopolitical benefits to prudent government involvement.”

London-based nChain sees benefits in decoupling large sections of the digital payment system from the “more fragile credit and banking system” and sees CBDC as an opportunity to free consumers from “free” financial services that actually offer “pay with help.” privacy business model. In addition, nChain is convinced that a US CBDC can improve financial inclusion. “If you would like to continue the discussion, please contact us and we would be honored to provide further assistance,” the authors write.

Privacy concerns go deep

Several questions stand out as pain points in all responses. Some question the ability of the US CBDC to expand financial inclusion, noting that many of those who are not banked are not banked by choice. Interest payments on US CBDCs and limits on the amount that can be held, both of which are potential monetary policy tools, are viewed with particular uncertainty. nChain is an exception to this general rule, opposing both on the grounds that physical money is not subject to these restrictions.

However, privacy stands out as the most serious issue. Privacy issues are repeatedly mentioned in the answers and are even brought up by responses from specialized organizations.

The Electronic Privacy Clearinghouse is a public interest research center in Washington, DC that focuses on privacy issues, including consumer privacy. EPIC doesn’t want to release CBDC, but recommends in its response that, if this happens, the Fed should adopt a token-based digital currency that does not rely on distributed ledger technology and its permanent record keeping. It argues that the intermediary token issued by the Fed could be designed to protect privacy while still allowing control over the fight against money laundering and terrorist financing.

“The digital payment space today is a privacy nightmare,” EPIC lawyer Jake Wiener, co-author of the center’s comments, told Cryptooshala. “CBDC will only improve privacy when combined with strict regulations to ensure that the current payment services industry is not duplicated with exploitative digital wallets and point of sale systems. Technology alone is not enough.”

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In its letter, the center says the token has several other benefits. It could be incorporated into the current banking system with improved consumer privacy and at a lower cost than DLT can provide. The Hamilton Project, a CBDC research project run by the Federal Reserve Bank of Boston and the MIT Digital Currency Initiative, also found that the tested non-blockchain model is preferable to DLT due to its much faster processing time.

EPIC comments widely cite the ideas of XX Network founder David Chaum. Chaum himself told Cryptooshala: “Privacy has to be built into the CBDC and it only matters if it can’t be secretly removed. Of course, there are other important considerations: preventing large-scale criminal use, enfranchising unbanked individuals, and protecting against counterfeiting. But without built-in privacy, CBDCs will not drive economic growth in the way real electronic money can.”

According to the American Civil Liberties Union and 11 other non-governmental organizations, came out short letter: “Anonymity must be paramount in the pursuit of a fairer and safer financial system.”