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U.S. Facing Pressure from China as Digital Currency Adoption Debate Continues

Experts expressed concern about the U.S. falling behind China on the development of a central bank digital currency.

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Photo of Stephanie Segal from CSIS

WASHINGTON, May 12, 2022 – The U.S. is falling behind China as the central bank ponders whether to adopt a digital currency, according to observers.

“If other countries are innovating in a direction that could represent a technological advantage, and the US is not prepared to meet that challenge, the U.S. will be at a disadvantage,” said Stephanie Segal, senior associate of the economics program at the Center for Strategic and International Studies. She and other panelists were speaking at a CSIS event on Thursday.

Segal’s comments were supported by her colleagues at the center, which hosted panelists to discuss the promises and pitfalls of creating a central bank digital currency. These stablecoins, as their called, are backed by other currencies, including fiat money.

Matthew Goodman, senior vice president for economics at CSIS, noted there is a lot of uncertainty surrounding this debate on the digital dollar. While there has been interest in the U.S. for developing such a currency system, Goodman said the US is relatively “behind” and delayed in conversations about CBDC compared to countries like China.

According to Fariborz Ghadar, scholar and senior advisor at CSIS, developing a CBDC is no easy fix, and is a risky step. However the concern about China having already developed a CBDC is a “major triggering point” he said.

Steven Kamin, senior fellow at the American Enterprise Institute, called China’s development of CBDCs “nearly operational” and potentially problematic for the U.S., with China as a world leader in technology. Kamin was speaking at an AEI event in April.

Risks of such a digital currency

A CBDC has upsides, but also presents risks to privacy and cybersecurity, according to Segal. She said a CBDC could create fear about data collection methods, regarding who has access to the data, and wonders if privacy protections would be provided.

Additionally, instead of having various intermediary points of security with the current banking system, a central bank digital currency would only have one point of security, making cybersecurity more vulnerable to threats, according to Segal.

Blockchain

Finance Experts Weigh Merging Regulatory Agencies to Tackle Cryptocurrencies

‘A lot of regulatory gaps exist because we have two regulators.’

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Photo of Dawn Stump of CFTC’s Global Markets Advisory Committee from September 2019

WASHINGTON, May 19, 2022 – Crypto market observers are calling for a change in the regulatory system and laws to tackle the quickly growing world of digital currencies.

“We will need new substantial law,” Douglas Elliott, financial regulation expert and partner at consulting firm Oliver Wyman, said on a panel hosted by the Federalist Society on Tuesday. “There are too many ambiguities” with the current regulatory system, he added.

As state and federal governments consider how the growing crypto industry should be regulated, various crypto experts further argued Tuesday for a redesign of the regulatory structure, while others said there was no need for a consolidation of agencies.

Part of the reasoning behind the consolidation is confusion about whether cryptocurrencies are commodities or securities. As such, some are recommending a merger between the Securities and Exchange Commission and the Commodity Futures Trading Commission to handle the regulation of the digital money.

“A lot of regulatory gaps exist because we have two regulators,” said Michael Piwowar, executive director at the Milken Institute Center for Financial Markets, suggesting that Congress merge the two into a single regulatory body.

Thomas Vartanian, executive director at the Financial Technology and Cybersecurity Center, backed the agency merger idea. Vartanian explained that despite the existence of cryptocurrencies for fourteen years, crypto remains largely unregulated.

“Bottom line is we’ve built a business of ten trillion dollars with no regulation and that is a financial risk,” Vartanian said. “We are building a financial time bomb.”

But Dawn Stump, former commissioner of the CFTC, said the best way to address these gaps in crypto regulation is not to redesign the regulatory system.

In August 2021, Stump said in a public statement that due to public misunderstanding about the CFTC’s regulatory oversight authority, “there has often been a grossly inaccurate oversimplification offered which suggests these are either securities regulated by the Securities and Exchange Commission or commodities regulated by the Commodity Futures Trading Commission.”

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Central Bank Wise to Move Cautiously with Digital Currency, Event Hears

‘The Fed seems a little bit more uncertain about’ digital currency versus other nations, another panelist said Tuesday.

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Photo of Eswar Prasad, via Flickr

WASHINGTON, April 21, 2022 – The Federal Reserve is “very wisely moving cautiously” about whether to adopt a central bank digital currency, an American Enterprise Institute event heard Tuesday, as other countries move forward on adopting the latest financial instrument.

“The Fed has been approaching this in a very sagacious manner by putting out the issue for public debate, thinking about the pros and cons and arguing that they will not move forward unless there is broad political and public support. But, I think the reality is this is where we are going, and it’s going to be in some ways an interesting world,” said economist and author Eswar Prasad, who published a book last year called, “The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance.”

“The world of CBDCs is going to be an interesting one,” Prasad said at the think tank event. “And this is certainly what we are moving towards.”

The current conversation surrounding CBDCs in America, which would ride on a digital ledger called the blockchain and are backed by the nation’s dollar, is delayed in comparison with other developed countries that have already made strides in government adoption of federal currencies.

“Among the advanced economies, Sweden’s Riksbank seems nearly dead-set on issuing an e-crono, while the Bank of England, European Central Bank and Bank of Canada are giving CBDCs serious consideration. The Fed seems a little bit more uncertain about it,” Steven Kamin, senior fellow at the AEI, said at the event.

At a Federalist Society event last Thursday, academics argued that such digital currencies backed by other currencies, such as stablecoins, can improve financial inclusion. It has also been said previously that these digital currencies could expedite federal payments to citizens. And because they’re backed by the government, there is a perceived added level of security and trust.

The panelists’ discussion also veered into the developments of China’s CBDCs, which are “nearly operational,” according to Kamin. This could potentially be problematic as the US economy is already grappling with the effects of China being a world leader in the manufacturing and distribution of semiconductors, a key product of important technology.

Experts have previously said that, if the U.S. is to remain competitive on the international cryptocurrency scene, the government must take key steps to solidify its digital currency systems.

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Academics Note Financial Inclusion Possibilities of Stablecoins, But Also Warn of Risks

Scholars debate stablecoins as their use increases.

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Timothy Massad, research fellow at the Kennedy School of Government at Harvard University, via Flickr

WASHINGTON, April 19, 2022 — Academics at an event hosted by the Federalist Society argued Thursday that stablecoins, digital currency that bases their value on other currencies, can improve financial inclusion.

At the law organization’s Thursday event, Paul Jossey, a lawyer and adjunct fellow for cryptocurrencies at the Competitive Enterprise Institute, argued the benefit of stablecoins as a way to increase financial inclusion in the country, while Timothy Massad, a research fellow at the Kennedy School of Government at Harvard University and adjunct professor of law at Georgetown Law School, asserted that it is only one way of many to ensure a more equitable monetary system in America.

“Stablecoins are digital assets pegged to the value of a stable monetary value, usually the US dollar. If you go anywhere in the world right now where there is a crisis, extreme poverty, people in desperate situations, you will find people trying to acquire stablecoin,” said Jossey. Because stablecoins have proven to be in demand around the globe, Jossey said expects them to take off in America if given the proper attention.

Massad, in some ways, said he agrees with Jossey’s point. “People who live paycheck to paycheck, even if they have a paycheck, often face delays in getting their payments cashed – it can take 3-5 days.

“If they need to pay their bills right away, they can’t do that, so what do they do? They go to a check cashing service where they have to pay maybe 10 percent of the value of their check, but they get the cash with which they can pay their bills right away. Speeding up payments would be beneficial to them. Having them be able to have digital accounts that aren’t as costly as bank accounts might be a good thing, too. Stablecoins are potentially a way to address that, but there are other ways to address it too,” he said.

But Massad also noted the risks of using stablecoins as a way to address these problems.

“Blockchains can have issues,” he said, referring to the digital ledger on which all digital transactions are recorded. “They can have software bugs, they can be hacked, they can simply be not big enough, not resilient enough, to handle the trading. They’re not regulated in any way, so there’s a payment system risk there too,” he said.

Jossey agrees that there should be more regulation, but not heavy handed. “I think that this new iteration coming from Web3 where it’s individually centered and the power and the data stay at the individual level and can remain there so…content creators are not giving most of their take to these massive platforms like Youtube. All of this will be fueled by stablecoins.

“In a perfect world the government would be encouraging this [stablecoins] and not stifle innovation. I do agree with Tim that there should be some guardrails as far as disclosure and redemption policies, but other than that we should just let the people who are creating this stuff do their work,” Jossey added.

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