US Official Calls for Balance to Manage Fed-Led CBDC Risks

Graham Steele, Assistant Secretary for Financial Institutions, emphasized the growing trend of digitization in financial services during the Transform Payments USA conference. The official touched upon challenges and opportunities presented by FedNow, the scope of a potential fed-led CBDC, and open banking.

According to Steele, the introduction of FedNow, the Federal Reserve’s new service for faster payments, marks a pivotal shift in the payment settlement structure.

Exploring the Federal Reserve Digital Dollar CBDC in the United States

The U.S. FedNow payment system is scheduled for launch in July. It allows for real-time gross settlements, but the official also hints at potential risks. He notes that fraud scenarios are more complex in this sector than seen in traditional banking.

Meanwhile, Steele noted, “It can also enhance resiliency in the payments system by providing redundancy that helps ensure that disruptions or outages in one operator do not completely halt the flow of transactions.”

The emergence of FedNow and the broader adoption of central bank digital currencies (CBDCs) have raised concerns. It has to do with privacy and financial freedom. There is apprehension that digitalization could eliminate the transactional anonymity associated with traditional cash transactions. And users fear it will allow central banks to monitor and scrutinize individual transactions.

In this regard, Steele clarified that the United States is exploring the potential implementation of CBDCs and evaluating their implications. He noted, “To be clear, the United States has not yet determined whether it will pursue a CBDC.”

Steele continued, saying that a Federal Reserve-backed CBDC could offer potential benefits such as financial inclusion and a competitive payment system. However, he noted that there are challenges to address, including privacy protection, minimizing illicit financial transactions, and offline capabilities for areas with limited internet access.

He said,

“It is important that we consider the extent to which privacy and anonymity might be preserved and explore the technologies and methods available, including Privacy Enhancing Technologies (PETs), to enable such protections in the design of any potential retail CBDC.”

Balanced Approach to Consumer Data Sharing

Steele highlighted the need for a balanced approach to consumer data sharing, particularly within the context of fintech firms. Regulatory frameworks, like the Revised Directive on Payment Services (PSD2) in Europe, provide standards for secure, consumer-permissioned data sharing, according to Steel.

Recently, G7 countries recognized the potential benefits of CBDCs while noting concerns about government overreach. The G7 welcomed the International Monetary Fund’s work on a CBDC Handbook and planned further meetings to discuss the topic. However, the United States has lagged in regulatory implementation and the pace of digital innovation compared to its Asian counterparts.

The Bank of Thailand has initiated a pilot project for a retail CBDC involving up to 10,000 users. The project, scheduled from this month until August 2023, aims to explore the potential benefits and challenges in the sector. Meanwhile, Hong Kong’s monetary authority, HKMA, has also announced its intention to lay the groundwork for a public-use CBDC.