The Fed's Digital Dollar Report Compared with the Digital Yuan
The Fed has a crisis of vision, it is stuck in the past and unable to envision the future
The Fed’s long-awaited report on the “digital dollar,” the U.S.’s central bank digital currency (CBDC), read like a high school book report. To say I’m no fan is an understatement.
No one was looking forward to the Fed!s CBDC report more than I did. I was hoping for a document that would lay out basic principles for what the Fed envisioned for its CBDC and emphasize CBDCs importance in our shared digital future. Instead, we got this statement from the Fed:
“the paper is not intended to advance a specific policy outcome and takes no position on the ultimate desirability of a U.S. CBDC.”
Still, despite its shortcomings, the report did give us some idea of how the Fed is thinking about its digital dollar and makes the following question inevitable: “How will the digital dollar stack up against the digital yuan?”
A precise answer to this question isn’t possible but what seems apparent is that the digital dollar is already starting from behind. Not just because the project is years behind China’s but because the Fed isn’t asking the digital dollar to be a cash replacement as China did and seems stuck in the past rather than envisioning the future.
The PBOC’s approach
When China’s PBOC started its e-CNY project, it held its research institute responsible for designing a CBDC that would allow its new digital yuan to be cash!s rightful heir.
The PBOC demanded that cash!s primary functions must be maintained:
1. Using it does not require network connectivity.
2. It retains the anonymity of cash when transacting.
These two features may seem simple, but they are fundamentally what makes cash, well, cash.
The Fed’s approach
The Fed makes no such representations as to the digital dollar's eventual construction. Moreover, a close reading of the document makes no reference to CBDC as a cash replacement.
To the Fed’s credit, they may be heading off problems in the future. CBDC can only roughly approximate cash; therefore, not calling it a cash replacement may be to its benefit. Still, that the CBDC should try to replicate cash’s best features would seem desirable.
The Fed’s approach to the digital dollar is to start a discussion and on pages 21 and 22 of the report asks for feedback on what is essentially a complete list of CBDC design parameters. The old expression of “design by committee” seems appropriate.
The Fed scores a tie with the PBOC on Privacy
SCORE 1-1
Privacy is without question the most prominent issue concerning CBDC adoption. The fear that a CBDC will be a tool for state surveillance is, of course, foremost in any discussion about CBDCs.
On this point, we got the following from the Fed:
"Protecting consumer privacy is critical. Any CBDC would need to strike an appropriate balance, however, between safeguarding the privacy rights of consumers and affording the transparency necessary to deter criminal activity.”
Ironically, the Fed’s statement is broad and ironically less specific than the PBOC’s:
“It retains the anonymity of cash when transacting.”
Ironically the PBOC’s statement on privacy is at least on paper more expansive than the Fed’s. The PBOC showed that it made good on its promise of anonymity with the recent launch of the e-CNY app to trial cities across China this month. All transactions less than RMB 2000 (US$ 300) will be anonymous.
Screen shot of the e-CNY app showing anonymity limits and the different categories of digital wallet.
The PBOC’s solution of a maximum threshold for anonymous transactions would also seem to fit into the Fed’s concept of “appropriate balance.” So don’t be surprised if the Fed comes up with a similar solution.
What we needed from the Fed to beat the e-CNY was something more visionary that would allay citizens' fear and give the digital dollar a clear advantage from the start.
The best outcome we could have asked for from the Fed would have been a clear statement that the system would be designed with anonymity in mind that would put to rest privacy fears. This statement would have been far better:
"Protecting consumer privacy is critical. Any CBDC must retain the anonymity of cash when transacting. Privacy rights of consumers will be safeguarded by ensuring fully anonymous transactions below a level deemed necessary to deter criminal activity.”
As it stands now, the digital dollar seems on par with the e-CNY; we have no statement from the Fed declaring a strong commitment to privacy, and the “appropriate balance” comments seem well far too fluid for those worried about privacy.
e-CNY and Digital Dollar tie with the same two-tier or intermediated system.
Score 2-2
What was unsurprising is that both the Fed and PBOC are using a two-tier style CBDC. That neither central bank wants to disrupt the banking system is a given. This also puts to rest the relentless absurd comments I read about individuals having a bank account with the Fed.
The Fed is clear:
“Under an intermediated model, the private sector would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments. Potential intermediaries could include commercial banks and regulated nonbank financial service providers and would operate in an open market for CBDC services.”
Stop the madness
The idea that the Fed would have individual accounts for the U.S. population shows up regularly in the press and is at face absurd. Still, it hasn’t reached Senator Emmer, whose ridiculous legislation of Jan 12th against CBDC explicitly states:
“A Federal reserve bank may not offer products or services directly to an individual, maintain an account on behalf of an individual, or issue a central bank digital currency directly to an individual.”
It's nice to see that this absurd legislation has already been rendered moot, by the Fed selecting a two-tier design but the bigger problem is that many still believe that they’ll have a bank account at the Fed.
Identity verification China’s e-CNY wins.
Score 2-3
Here is one area where the Fed failed badly. It makes a critical error by looking to the past and its experience with banks for identification rather than the future with telecom.
The Fed writes:
"In practice, this would mean that a CBDC intermediary would need to verify the identity of a person accessing CBDC, just as banks and other financial institutions currently verify the identities of their customers”
The Fed is leaning on its experience within the banking sector, which frankly needs a major overhaul. The Fed seems not to comprehend its statistics that show that 22% of the U.S. population is underbanked or unbanked.
Underbanked adults have a bank account but also use alternative financial service products like check cashing or payday loans. Source: The Fed
A digital dollar is an opportunity to increase financial inclusion, and the Fed needs to start thinking “out of the box.” If the Fed doesn’t break out of its comfort zone, others will do it for them. Congresswoman Maxine Waters, Chair of the powerful House Committee on Financial Services, recognized the opportunity: "We must continue to explore a CBDC and be laser-focused on financial inclusion.”
The Fed needs to understand that bank onboarding is something that needs to be heavily modified to get the financial inclusion benefits that CBDCs offer.
This is something that China has done a great job with by allowing a low-tier CBDC wallet through identification by a mobile number or telecom provider. For this low-value basic wallet, there is no bank registration required. This low-tier wallet caps savings at RMB 10,000 or US$ 1,700.
The important thing to recognize is that with a low level or basic CBDC wallet underbanked and unbanked can get basic access to the financial system without ever walking into a bank.
What the Fed needed to do was show that it was willing to open use of the digital dollar. More like this:
“Identification verification of CBDC payments must ensure that America!s most vulnerable are not excluded from the
financial systems. CBDC users will be subject to identification systems operated by intermediaries that may include novel use of telecom and state agencies in addition to those currently operated by banks.”
China wins on offline transactions
Score 2-4
One of the more absurd portions of the Fed’s report is when it asks for guidance on whether the CBDC should have offline capabilities. The Fed asks:
“Should a CBDC have "offline” capabilities? If so, how might that be achieved? “
That the Fed asks if this capability should be included is absurd when the Fed stated earlier that “a CBDC could enhance the operational resilience of the payment system if it were designed with offline capability.” So it’s clear to the Fed that offline transfer is fundamentally a useful feature. So why ask? Just do it!
Here, the PBOC wins both because it recognized in the early design stage that offline use was critical for financial inclusion and that it had at least some idea on how to do it. The Fed seems incapable of even grasping how such a capability could be achieved. It is hard to believe that the Fed represents the country that went to the moon and gave birth to the digital revolution.
This is where the Fed sinks to new lows in its ability to envision a digital future that looks after its vulnerable by providing them with offline services to promote inclusion. Just as bad the Fed doesn’t even recognize the competition. Would the Fed dare launch a CBDC without offline capability when the PBOC has one? The entire question is absurd.
Final Scores
The score of 2-4 in China’s favor is intended as a light-hearted way of comparing these two digital currency projects. Until we have two finished products in front of us, the results are inconclusive. Fans of baseball will say correctly that these are “early innings.” That said, they do point out how the Fed and PBOC envision their digital currencies and what I see from the Fed does not inspire confidence.
The Fed’s initial report on CBDC is uninspiring. Even if the Fed wanted to retain a semblance of neutrality on CBDC issuance, it still should have shown some vision and insight into what a US CBDC would look like. The U.S. is proud of dollar supremacy and views the dollar as special. That’s understandable, but shouldn’t the digital dollar be equally unique and imbued with the rights and privileges encompassed within non-digital dollars?
CBDCs are neither good nor evil; they are digital products that encapsulate the societal norms of the countries that issue them. So what should concern you is that none of the U.S.’s high ideals seemed encapsulated in its new digital dollar. Privacy remains ill-defined, and looking after the little guy through inclusion was reduced to a question “should we have offline payment?.” The Fed should have committed to solving this fundamental problem.
What should concern you
The Fed is being coy by seeking comments on the questions raised on Pages 21 and 22 of the report. They are worth looking at, but I have bad news. Most of them have already been answered in BIS and other publications on CBDC. This is why I call this a "high-school” book report on CBDC. The questions aren’t there because the Fed doesn’t know these answers. Their highly skilled staff members most certainly do.
The reason the Fed asked these questions is that it has no genuine desire to issue a digital dollar. This is clear not just from the report but from myriad comments by Fed governors who claim that CBDCs are “a solution looking for a problem.”
By asking these questions, the Fed gives a gift to the banking sector whose lobbyists will go into high gear by finding disaster scenarios for each. This will help the Fed delay its CBDC for years and build one as favorable to banks as possible. Call me paranoid? Just wait until we get a review of the commentary! Banks loathe CBDCs, and their lobbyists are set to pounce.
Perhaps the saddest part of the Fed’s report is that it shows how the Fed is building a CBDC out of fear of crypto rather than because it believes Americans deserve one. The report references access to safe central bank money throughout the paper. I get that the Fed doesn’t like crypto, and they have every right, but this would seem a weak motive for building a CBDC. Wouldn’t serving citizens be far better?
What is sad is that the Fed doesn’t for one second believe that Americans deserve a better digital future without bank transfer charges, bounced checks, and overdrafts. The lack of vision of how a digital currency will improve people’s lives shows a consistent lack of empathy. This omission only confirms our commonly held belief that the Fed serves banks and not the people, including the poor, it is supposed to defend.
Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is an Onalytica Top 100 Fintech Influencer and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.
