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Federal Reserve: 5 prerequisites before the issuance of central bank digital currency

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Central bank digital currencies still have a lot of work to do.

This article comes from the official website of the Federal Reserve federalreserve, original author: Jess Cheng, Angela N Lawson, Paul Wong

Original translation: Odaily Planet Daily Moni

Money is a social and legal structure based on trust, but now, the concept of money has evolved.

In 1914, the Federal Reserve issued paper money for the first time, which also created a new currency era.

Now, people are starting to arbitrage a new form of central bank currency, which is completely different from physical cash, and it is-central bank digital currency.

The key to the success of "money" is whether it can be regarded as a safe, stable and reliable tool:

*Cash, central bank deposits and potentially central bank digital currency are all central bank liabilities;

* Money in bank accounts is Liabilities of commercial banks;

* The balance on the retail stored value card is the liability of the issuing bank.

But most people don't think of money as a liability and obligation of a bank or other entity, people don't care about "how the money is recorded on some ledger" This is a matter of detail, but whether the "currency" is safe and secure to use for today's and tomorrow's purchase transactions. At this stage, the vast majority of people believe that the currency can maintain its full value, the funds inside the bank are safe, and the enterprise will honor the commercial credit - from this perspective, the central bank digital currency can provide a safe and reliable alternative currency form.

In recent years, with the introduction of global stablecoins, technology giants have entered the payment market, and some countries have launched the prototype design of central bank digital currency, the Fed’s interest in digital currency Interest has grown considerably. Especially during the COVID-19 epidemic, the Federal Reserve found that the traditional retail payment market was inefficient and unable to better complete the allocation of economic stimulus funds, while the advantages of digital currency became more and more obvious.

The Federal Reserve believes that if the United States is determined to support a "general-purpose CBDC", five necessary prerequisites must be met:< /p>

1. Clear policy goals

2. Wide range of stakeholders

3. Sound legal framework

4. Strong technical support

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5. Perfect market preparation

Next, let Mr. Xingxing (WeChat: o-daily) learn more about it with you Here's how the Fed sees these five prerequisites.

1. Clear policy goals

Quoting the basic elements of the central bank's digital currency is to understand What is the purpose of issuing central bank digital currency? Including:

* Where can central bank digital currency be used?

* How to use the central bank digital currency?

* What potential value can central bank digital currency provide?

Central banks of various countries have great differences in research and experimental interest in digital currency, mainly divided into two attitudes:

* Some central banks hope to use central bank digital currency to deal with the current currency adjustment;

* Some central banks hope to use central bank digital currency to explore future affordability.

For the United States, whatever the specific goals of a central bank digital currency, it should work with the Federal Reserve to provide a secure and efficient payment system, as well as monetary and financial The long-term goal of the problem remains the same.

2. Broad stakeholder support

Establishment A central bank digital currency requires the input, participation and support of many stakeholders in the public and private sectors. Although it is unlikely to satisfy everyone's needs, at least it needs to reach a consensus on inclusiveness and universality. The Federal Reserve believes that the main stakeholders of central bank digital currency include:

* government agencies

* End Users

* Financial Institutions

* Technology Service Providers

* Infrastructure Providers

* Academia

*Standard-setting organizations

Considering the various interests involved, as well as the need to make a large number of complex decisions in system design, ecological development, etc., the central bank It may take a long time for digital currencies to gain broad support from all stakeholders in the United States. So, what role do these key stakeholders need to play in a central bank digital currency?

Government Agencies – The role of government support is critical to facilitate the legal and social changes needed to introduce central bank digital currencies, and the legislative and executive branches of government will need Make important decisions affecting the design and implementation of central bank digital currency, such as:

* Agreeing on the authority of the Federal Reserve to issue a general-purpose central bank digital currency

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* Regulate the relationship between the central bank and the public

* Explore potential legislative changes

* Clarify contract law, privacy rights and consumer protection, including issues related to taxation, public expenditure, counterfeiting and fraud, anti-money laundering and cybersecurity.

End users – end users of different ages, geographic locations, payment habits, and financial literacy must be considered during the design and testing of central bank digital currencies, and The study focuses on the following three questions:

* How do people use central bank digital currencies via smart cards, smartphones, fingerprints, iris scans or other means?

* Why should end users choose central bank digital currency instead of other payment methods?

* How much responsibility does the end user bear when considering the trade-offs that may need to be made through consumer protection and distributional loss?

The Federal Reserve also needs to work with individuals and businesses, and consult with consumer groups, community organizations and business associations, to gain insight into the practical use cases of a central bank digital currency.

Financial institutions - the introduction of a central bank digital currency could lead to significant changes in market structure and dynamics, which may even affect commercial bank deposits, bank credit and more generally financial system. Of course, all of this depends on the characteristics of the central bank's digital currency and how it is implemented. If issued reasonably, there may be little or no interference with banks. For financial institutions, whether they are policy banks, community banks, Internet banks, or other types of non-bank financial companies, they need to inform policy makers of their potential impacts, benefits, precautions, and policy requirements .

Technology and Infrastructure Providers - Technology and infrastructure companies play an important role in today's market and a potential central bank digital currency could take many different forms, With the introduction of digital technologies into fiat currencies, it may also accelerate the exploration of payments and other financial services by "emerging technology and infrastructure providers" - including big technology companies and fintech companies - to effectively address central bank digital Issues of currency design, interoperability, market structure, and market adoption.

Other stakeholders - Other stakeholders include academic institutions, think tanks, standards organizations and the international community who can inform and support a central bank digital currency : Academic institutions and think tanks can provide guidance for decision-making, and standards organizations can support the broader ecosystem by defining terminology, developing taxonomies, and creating specifications and standards.

3. Sound legal framework

The main role of the Federal Reserve in the US financial system is To safeguard public confidence in money, a key prerequisite for issuing a central bank digital currency is to have a robust legal framework that enables general-purpose central bank digital currencies and wider market users to be confident that the tools they use to transfer value are robust, reliable, smoothly functioning and Safe, but also with clear payment rules and protections. Any cracks will weaken the public's trust in the central bank's digital currency. The key to establishing such a sound legal framework needs to determine the following aspects:

* Clear Legal authorization, such as whether the issuance of a general-purpose central bank digital currency is consistent with the mandate, functions, and powers of the Federal Reserve under the central bank law (known as the Federal Reserve Act (FRA)).

* Legal tender status, making it clear that all money issued by the Federal Reserve is a valid and legal means of payment to settle creditors' "debts".

* Comply with anti-money laundering rules, combat terrorism financing and counter sanctions evasion, and reduce the risk of central bank digital currencies being used for illicit activities.

* Privacy, and protection of personal data.

* Legal roles and responsibilities, central banks may need to assume roles and responsibilities related to the public.

4. Strong technical support

Technology will partially affect the design and function of digital currency , in some cases, the business and operational requirements based on a specific central bank digital currency design may require the development of new technologies, such as the need to increase the central bank digital currency transaction throughput capacity according to the growth of economic scale, meet offline transactions, support security hardware, etc., Therefore, a lot of technical development and evaluation work is required in the three core aspects of system integrity, operational robustness, and operational resilience.

The following will analyze in detail the three key aspects of the basic technology of the central bank's digital currency:

System Integrity: Central bank digital currency must be able to function as intended in a manner that is not compromised and free from unauthorized manipulation, mainly including:

* Yes Ability to provide safe and efficient asset transfers

* Accurate record keeping, effective anti-counterfeiting measures and strong fraud detection capabilities

*The ability to manage and prevent unauthorized access, use, destruction, modification or destruction to provide system confidentiality, integrity and availability

* Seriously enforce strong information security controls to protect information assets

Operational robustness: Central bank digital currencies must be The ability to operate correctly and reliably under conditions, mainly including:

*Provide instant settlement and continuous 24 hours / 7 days availability

* Provide flexible and adaptable technology so that arrangements can be changed as needed

* Due consideration should be given to the functioning of the ecosystem Robustness, not just considering the robustness of the operator

Operational flexibility: The central bank's digital currency needs to have the ability to resist, absorb and fade, mainly including:< /p>

* If an internet connection is required, please consider the potential for loss of connection

* From the people , Information, Systems, Processes and Facilities Perspective

* Consider End-to-End Resilience

5. Complete market readiness

Only when the market is ready - end users are willing to adopt it (requirement layer), and the ecosystem can support it at any time (Supply side) is the best time to introduce central bank digital currency. Assessing market readiness often requires an understanding of the conditions that may support or facilitate the adoption of a central bank digital currency, and whether the components of the system are ready and effectively coordinated. While market readiness times are often impossible to predict accurately, surveys, interviews, tests, etc. can be used to understand how the market is progressing. The following figure shows several aspects of the driving force and resistance of the central bank's digital currency market, which may be used as a reference evaluation indicator:

Summary

Issuing a central bank digital currency in the United States is not an easy task, and many factors need to be considered.

Clarifying policy goals is the key to guiding the design of central bank digital currency. At the same time, it needs the support of a wide range of stakeholders to achieve the necessary social and legal changes, improve How society views money and how people use digital currencies. Not only that, a strong legal framework needs to provide a basis for the central bank's digital currency issuance, distribution, use and destruction, relying on stable technical support to ensure its security and efficiency. Finally, the market needs to be ready for widespread acceptance and adoption of a central bank digital currency. All these prerequisites are actually interconnected, but each one will take a lot of time to achieve.

As Federal Reserve Chairman Jerome Powell recently said of central bank digital currencies, "Central bank digital currencies still have a lot of work to do." Do."