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(Kitco News) - As the U.S. continues to explore the development of a digital dollar, one Treasury official has urged the Federal Reserve to make privacy and the ability to transact anonymously a key design feature of any U.S. central bank digital currency (CBDC).
While speaking at the Transform Payments USA conference in Austin, Texas on Monday, Assistant Secretary for Financial Institutions Graham Steele addressed several topics, including CBDCs, the FedNow system, and how to promote financial inclusion.
“Many jurisdictions around the globe are also exploring Central Bank Digital Currencies (CBDCs) as an option for upgrading money and payments infrastructure,” Steele said. “To be clear, the United States has not yet determined whether it will pursue a CBDC.”
In an effort to support the development process, the Treasury is leading an interagency working group intended to help provide “a broader Administration perspective for considering the implications of any potential U.S. CBDC,” he said. This includes the evaluation of policy objectives related to global financial leadership, national security, privacy, illicit finance, and financial inclusion.
“Striking the right balance between these priorities, and realizing potential benefits while minimizing risks, would depend on the design of both policy and technology,” Steele said.
When it comes to the introduction of a retail CBDC (rCBDC), which would be a direct liability of the central bank that is accessible to the general public, Steele said it “could contribute to a more competitive and innovative payment system; support financial inclusion; and help preserve the face value redemption of the currency.”
“The extent to which a retail CBDC would promote these objectives depends on many future design decisions, including decisions about the range of intermediaries that would act as service providers in the CBDC ecosystem and the requirements to which those intermediaries would be subject,” he said.
The major risk presented by an rCBDC is that “runs” into the payment vehicle “could destabilize private sector lending,” Steele said.
“As we have seen in the recent episodes of banking turmoil, a combination of technology, highly concentrated depositor base, and access to non-deposit alternatives outside of the banking system may have changed the nature and speed of bank runs,” he added. “With the technology enabling the movement of deposits only getting faster, there could be additional risks associated with introduction of CBDC.”
Ensuring user privacy while minimizing the risk of illicit financial transactions is also a major challenge, he said, and “fulfilling both of these important objectives requires a careful balance in the design of any potential retail CBDC.”
Steele noted that privacy concerns and a lack of institutional trust already rank at the top of reasons that some individuals avoid the banking system, so it's important to address these issues while creating an rCBDC in order to support the adoption process.
“Some communities may be more privacy sensitive and have heightened concerns about private or public entities accessing their personal information,” he said. “In this vein, 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.”
Steele said these technologies could play a pivotal role in maintaining transactional privacy while also ensuring transparency and traceability, which would help reinforce the trust of users in conducting digital financial transactions.
He also noted that offline capabilities are an important element that needs to be addressed with any potential CBCD, as the service needs to be readily available in areas with limited or no internet connectivity.
“We know that a significant number of individuals in the United States lack access to reliable internet, and individuals who face barriers to mainstream financial services are also more likely to lack access to certain technology services and infrastructure,” he said. “It is important to consider the needs of these marginalized communities in the design of any potential CBDC.”
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On the topic of FedNow – which is a 24x7x365 service that will provide U.S. depository institutions and U.S. branches of foreign banks with the ability to send and receive interbank payments instantly – Steele said the system “marks a pivotal shift in our public payments infrastructure, fundamentally altering the payment settlement structure by facilitating direct, real-time gross settlements (RTGS) for interbank payments.”
The major benefit of FedNow is that it eliminates the issue of deferred net settlement as it enables transactions to be settled near instantly.
“Treasury sees the value in encouraging the use of instant payments to support a more competitive, efficient, and inclusive U.S. payment landscape,” he said. “To that end, Treasury has signed up as an early adopter of the FedNow payment service. While the vast majority of government payments are regular, predictable, and scheduled, we are piloting the usage of FedNow for payments where speed is particularly important.”
The shift towards the digitization of financial services “promises significant benefits but presents us with some substantial challenges,” Steele said. “By striking the right balance as industry leaders and policymakers, we can ensure that this transformative moment in payments addresses, rather than reinforces, the shortcomings that so many experience under the current status quo.”
