Digital Currency What It Is, How It Works, What the Dangers Are
R ecently, the Federal Reserve and the Biden administration have been considering the creation of a central bank digital currency (CBDC), which would be managed by the Federal Reserve. Many other countries are also devel- oping or exploring CBDCs. However, the potential implementation of a US CBDC program is being evaluated and has become a subject of contro- versy due to concerns regarding indi- vidual privacy and freedom to spend versus government oversight and control. Some argue that the CBDC should replace the paper dollar as legal tender, while others have reser- vations about such a transition. What Is a Central Bank Digi- tal Currency? In summary, a central bank digital currency (CBDC) is a digital form of
money issued by a central bank, simi- lar to paper money but in electronic format. A US CBDC would be the digital version of the US dollar issued by the Federal Reserve, backed and regulated by the central bank. Unlike other cryptocurrencies, CBDCs act as legal tender and are supported by the issuing central bank. Over 90 countries’ central banks are currently exploring or implementing their own CBDCs. Some of them are even testing cross-border transac- tions or exchanges. China is the first major country to widely adopt a CBDC within its economy, and its central bank is actively participating in a cross-border payments development project facilitated by the Bank for International Settlements (BIS). The BIS, established in 1930, is an inter- national organization owned by and serving 63 central banks, monetary
authorities, and other international financial authorities, and support- ing them in managing their foreign exchange assets. In simpler terms, the Bank Policy Institute, a nonpartisan group repre- senting major banks, explains how a central bank digital currency (CBDC) would function as a liability of the Federal Reserve. Currently, when people deposit money in a bank, it becomes a liability for the bank, and that money is used to fund loans, which are the bank’s main assets. With a CBDC, if individuals and busi- nesses switch from bank deposits to CBDCs, their money will no longer fund the economy through loans but will instead fund the government and government-sponsored enterprises. Essentially, it will shift the source of funding from the private sector
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42 • AMAC Magazine
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