The Treasury Department has recommended that the government start developing its own digital currency, just in case it wants to use one. The department has written The report – one of the three – as required by the decree of March “Ensure responsible development of digital assets“, which instructed the Treasury to examine and make recommendations on the future of monetary and payment systems, consumer and investor protection and illicit financial risks.
The recommendation on digital coins, contained in the report on “the future of money and payment systems”, stated that a “central bank digital currency” could have significant benefits for the economy. This could help create a more efficient payment system, lay the foundation for new innovations, facilitate more efficient cross-border transactions, promote financial inclusion and encourage environmental sustainability.
This last point may seem counter-intuitive to those familiar with the large energy requirements of some cryptocurrencies (a report estimates that Bitcoin alone consumes as much electricity as the entire nation of Argentina). It is these same observations, however, that led the Treasury to emphasize that such a digital currency should avoid these pitfalls. It is believed, however, that this can be solved by the structure of the currency itself.
“If blockchain-based, a US CBDC would likely use a permissioned blockchain, which consumes relatively less power than a permissionless implementation, because the majority of the power consumption of permissionless blockchains comes from the consensus mechanism. Additionally, policy makers may need energy efficiency as a key tenet of CBDC technology development in the U.S. This technology could form the basis of environmentally sustainable technologies for other financial markets, fostering public welfare,” the report said.
The Treasury added that there were also national security implications behind the development of a digital coin. If the government were to proceed with a digital currency, the report says it should be designed to help preserve US global financial leadership and support the effectiveness of sanctions.
Whatever the design of a potential CBDC, the report says it should have at least three key characteristics: First, it should be legal tender. Second, it should be convertible one-for-one into reserve balances or paper money. And third, like reserve balance transfers on Fedwire or Fednow services, or in cash, the CBDC should clear and settle irrevocably almost instantly.
The report admitted that a US central bank digital coin would carry risks. There could be crises in times of crisis, and this could affect the availability of credit and increase credit losses for businesses and governments. Additionally, it may not be as reliable as the current system and may not operate at the same speed as private sector payment innovations.
Overall, while the report was agnostic on whether the country should ultimately adopt a digital currency, as China did recently, he said it would be a good idea to at least start laying the groundwork, as the actual R&D and implementation would likely take years. In order to do this preliminary work, he recommended that the Treasury Department lead an interagency task force to coordinate and examine the implications of a U.S. CBDC, as well as engage in information sharing with allies and partners, and that the directors and/or deputies of the Federal Reserve, the National Economic Council, the National Security Council, the Office of Science and Technology Policy, and the Treasury meet regularly to discuss the progress of the CBDC working group and share updates on CDBC and other payment innovations.
Beyond a possible US digital currency, the report also looked at payment systems in general. The Treasury recommended that the government encourage the continued use of instant payment systems such as Zelle or Venmo, which it said would help support a more competitive, efficient and inclusive payment landscape.
At the same time, acknowledging the risks these systems could theoretically pose to consumers, he also said the government should establish a federal framework for regulating payments. Although he argued that such a framework would be beneficial for a number of reasons, which mainly boil down to protecting consumers and encouraging competition in the marketplace, he did not elaborate on what this frame should look like.
Finally, the report recommends that the United States prioritize efforts to improve cross-border payments, both to improve the efficiency of the payments system as a whole and to protect national security.
The report on payment systems was the first of three out todaythe others dealing with the protection and education of investors and the last with the repression of financial crimes.