Biden takes big step toward government-backed digital currency

The Biden administration supports further research and development of the U.S. Central Bank Digital Currency.

Biden takes big step toward government-backed digital currency

The possibility of a U.S. digital currency is possible.

The Biden administration supports research and development for a "U.S. The Central Bank Digital Currency, or CBDC.

This is part of President Joe Biden's broad executive order, which instructs the federal government to investigate possible uses and regulations of digital assets such as cryptocurrencies.

The executive order states that "My Administration places the greatest urgency on research, development efforts into potential design and deployment options for a United States CBDC."

This order requires that a range of agencies begin research on digital currencies and submit reports.

"We are aware of the profound implications of possibly issuing a digital currency. On Tuesday, a senior administration official spoke out to reporters.

While a U.S. cryptocurrency would not change your everyday experience, such as buying goods or services, economists believe it could transform central and business banking as well as government sanctions and banking accessibility.

David Yermack is a professor at New York University and chair of the finance department.

According to the White House's fact sheet, the executive order will require the government to examine the technical requirements for a digital currency. It also calls for the Federal Reserve and the Federal Reserve to continue their research and development.

In January, the Fed published a whitepaper about creating a CBDC to complement existing payment systems. The Fed found that while a CBDC would make payments easier and cheaper for consumers, it could also put at risk the stability of the U.S. financial systems.

According to the fact sheet, the administration stated that it would also take steps to "mitigate illicit finance and national security threats posed by the illegal use of digital assets by directing an unprecedented concentration of coordinated action across all U.S. Government agencies in order to mitigate these risks."

The U.S. is not the only country to have a digital currency. China has its own CBDC. More than 140 million have opened digital "wallets." Many other countries have rolled out digital currencies or are in the process of developing them. The Sand Dollar of the Bahamas is one of the most popular digital currencies.

Yermack stated that the Biden administration's move pointed to the inevitability, he believes, of a wider move towards digital currencies.

He said, "It's not an issue of if, but when." It's almost over once the central banks begin to co-opt the technology.

Although the administration fact sheet didn't give any information about the U.S. digital currency, Yermack suggested that it could be fairly simple with transactions flowing directly from the Fed to and from banks, bypassing payment systems, and creating almost seamless cash flows.

This simple idea has the potential to have widespread implications. Yermack stated that a widely accepted digital currency would raise existential questions for banks, and other financial services that facilitate payments.

"Bill Gates once famously stated that there will always exist banking, but not always banks," Yermack stated.

According to Michael Bordo, an economist and director of Rutgers University's Center for Monetary and Financial History, digital currencies offer new opportunities for the government to exercise its policymaking power.

He said that a digital currency could be used to make the stimulus payments for the coronavirus pandemic almost instantaneously and much more efficient. It might even reach people who were previously shut out from banking services.

Bordo cited the Bahamas' digital currency as an example of how the unbanked could benefit.

Bordo stated that they found it worked and came up with simple ways to make it easier for low-income people without bank accounts.

A U.S. digital currency would not only provide benefits for consumers, but also give the Fed an opportunity to use a tool economists had previously only imagined: negative interest rates.

The Fed's primary method of stimulating or cooling the economy is to control interest rates. However, there are limits. The zero bound limit on how low banks can lower interest rates on regular currency is . This leaves central banks with very few options when interest rate are already low and the economy requires a boost.

Digital currency does not have a zero limit, which allows for aggressive action whenever needed.

Yermack stated that if the cash was electronic, the government could just erase 2 per cent of your money each year. This is due to the global demographic shifts.

Bordo also highlighted negative rates as an important characteristic of digital currencies.

He said, "I believe it's something which could be a major game changer for Fed."

A U.S. digital currency will face many real obstacles, despite all its theoretical potential. Bordo pointed out that banks and commercial institutions have an vested interest opposing the technology.

He said, "Getting this thing done is going to be an enormous project."

However, there is a growing trend towards government-backed digital currencies. Yermack stated that he has provided advice to major governments about starting their own currencies, and that the other countries will likely follow their lead as they adopt theirs.

"Two decades ago, everyone was ridiculing it," Yermack stated. It's now the hottest thing to do.

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