Julie Monaco, Managing Director, Citi speaks on the panel, "The Power of Private Capital in Sustainable Development," at the World Bank/International Monetary Fund Spring Meetings on April , 2023. Photo credit: World Bank/ Riccardo Savi

D.K. Reed Report: Here comes the U.S. Crypto, FedNow

6 mins read

A decade ago, cryptocurrency was a renegade, yet rogue threat to the U.S. monetary system. Now, the Feds are working to implement their own digital currency. My oh my, times have changed.

The latest de-dollarization has definitely been detrimental to cash flow. In the past weeks, there has been a run on several sizable banks. Then Russia and China announced a revised trading partnership and investment plan that removes their dependence on the U.S. dollar. In turn, other countries said they are open to deviating from the dollar dominance too. 

During this crunch, the U.S. needs to take action. Mainly, to address the issue of maintaining the dollar’s status, thus reducing its reliance on borrowing, to focus on dealing with its trade deficits. That means, their regular tactics of floating the dollar will not work this time out, so they must fix its value internally. 

What we now know is that the currency war we are in has many faces and brings up contentions within many groups, including its own citizens. Some American retailers and even national parks and museums are no longer taking cash. In the grander scheme of operations, digital transactions in lieu of handling cash are cheaper to carry out and much easier to monitor.

So, while you see it’s not just foreign countries who no longer want greenbacks, the larger question is, why is all of this happening? 

Since the US banking system is facing serious risks, the government is exploring an alternative: central bank digital currency (CBDC), or a digital form of the U.S. dollar. In September 2022, the Biden Administration released a six page report listing the policy objectives of developing a CDBC.  An executive order focusing on what they call a “responsible development of digital assets,” the Administration listed a range of goals for the CBDC—from protecting consumers and promoting economic growth, to aligning with democratic values. 

Fast Forward to this past March, in its 513-page economic report, The White House took time to provide data from its study on a potential CBDC. Citing that “members of Congress, staff members of the Department of the Treasury, and other experts have called for the Federal Reserve to offer a faster payment system for both businesses and retail users” in recent years, and especially after the pandemic. 

The report made the case that traditional payout systems such as the automated clearing house (ACH) transactions, hurt those who needed their money sooner than some payment systems distributed, which could take days. A CBDC, for the Biden Administration, is the best answer.

When implemented, the CBDC dollar shows that the U.S. remains steadfast about its monetary system. Still, it’s all about the C.R.E.A.M. 

For those of you who are not hip hop-informed, C.R.E.A.M. is a Wu-Tang Clan reference for “cash rules everything around me.” In that case, the Federal Reserve is going Bobby Digital (another Wu-Tang mention). So much so, starting in May, the Fed is introducing FedNow, a virtual platform designed to provide a safe and efficient way for financial institutions to send and receive real-time payments, 24 hours a day, seven days a week. 

FedNow “will enable all the banks—any bank in the United States, not just the big ones—to offer instantly available funds in real-time payments to their customers,” said Fed Chair Jerome Powell at a Fed chair meeting.

On one hand, the service is intended to improve the speed and accessibility of payments for individuals and businesses, and to promote innovation in the payments industry. On the other hand, CBDCs are often seen as a tool for governments to exercise greater control over their citizens’ financial activities, and some argue that they could eliminate all privacy.

“The federal government has no authority to unilaterally establish a central bank currency,” stated Sen. Ted Cruz (R-TX) in a release detailing a bill preventing the government’s ability to establish a CBDC. 

Sen. Cruz continued. “This bill goes a long way in making sure big government doesn’t attempt to centralize or control cryptocurrency and instead, allows it to thrive in the United States. We should be empowering entrepreneurs, enabling innovation, and increasing individual freedom—not stifling it.”

Furthering concern for some, there is a growing regulations war on crypto with companies that facilitate the purchase of crypto assets. The heavier and more stringent rules around crypto is a strategy. Before federal markets in any country can introduce their own digital crypto currency, they must first eliminate or contain all competition. To address this in India, its Central Bank has played a crucial role in the digital payments boom by implementing a digital identification and Central Bank digital payments. Now the country is moving towards fully implementing a CBDC.

But the road to regulation for CBDC in the U.S. might be far more choppier. Let’s take San Francisco-based Block Inc’s current issues. In late March, Hindenburg Research released findings from a 2-year-study of Block Inc. (SQ). The report concluded that SQ “misled investors on key metrics, and embraced predatory offerings and compliance worst-practices in order to fuel growth and profit from facilitation of fraud against consumers and the government,” through its flagship company, CashApp. 

Hindenburg Research described the internal systems of SQ as the “wild west” because of “opaque” compliance regulations that facilitated criminal activity. Co-founded and partially owned by Jack Dorsey, the founder of Twitter, Hiddbenburg also claimed that the peer-to-peer, quick payment platform that also made it possible to buy Bitcoin and file taxes, had “systematically [took] advantage of the demographics it claims to be helping.”

But the plot thickens. Shortly thereafter, CashApp’s founder, Bob Lee was stabbed to death in San Francisco. Ironically, the city was called “lawless” and full of crime in news reports. Just like Block Inc., the Silicon Valley-adjacent metropole is also trying to reshape itself from the after effects of the highs and lows of a tech industry that changed local economies such as the Bay Area.

Esther Dufflo speaks on the panel, “Investing in Human Capital to Accelerate the Green Transition” at the World Bank/IMF Spring meetings on April 14, 2023. Speakers explored how governments, the private sector, and partners can build shock-resilient systems that improve people’s ability to adapt and prepare people to work in the green jobs that will help mitigate climate change. Photo credit: World Bank / Taylor Mickal

⚈⚈⚈⚈ Digital globalization

All of these developments raise important questions about the future of the global economy and the role of governments in regulating financial transactions. Lawmakers in over 20 states are updating the Uniform Commercial Code to lay a foundation for a central bank digital currency (CBDC), which will be programmable and trackable, with no privacy.

The (UCC) is a set of laws and regulations to guide transactions in business. With the coming of FedNow, the UCC is expected to be amended to incorporate FedNow as a payment system.

Also under the commercial code, individuals are unable to own any CBDC money. This raises concerns about the loss of privacy and the idea that people will “own nothing” in the future. Some legislators are questioning whether the UCC is enough to regulate CBDCs. To address their concerns, they are exploring passing laws that would prohibit the use of CBDCs for commerce, but this is complicated by issues related to the Constitution and federal authority to regulate money.

To the favor of governments, CBDC can be controlled and manipulated,  and the rules can change as they go, which poses a threat to certain citizens’ freedoms. Plans for the CBDC suggest a design that accounts for climate change, financial inclusion, equity, and pollution, but removes the power from consumers and investors. For some the exchange works, but there are those who are vehemently against it.

“The ability of a free people to determine the means of exchange and which transactions they engage in is what makes them free,” expressed Vice Chair Representative Tony Randolph (R-SD), “and without it, you don’t have a free people.”

Rep. Randolph is part of the South Dakota Freedom Caucus that created a petition blocking the implementation of a CBDC. They argue a CBDC “could be fatal to our economy.”

On the other hand, the CBDC is framed as a currency that can “create financial inclusion” according to World Bank Deputy Director Bo Li who was a panelist at a conference on CBDCs last October. “A CBDC can allow government agencies and private sector players to program, to create smart contracts, to allow targeted policy functions.”

While CBDC’s actions can be prohibited in some ways, in other avenues, it can change on a dime. This is different from Bitcoin, which gives users ultimate power over their money. In contrast, the White House argued that Bitcoin had “high volatility risk” that contradicted its decentralized model because it lacked a “trusted central authority,” while having a permissionless user feature.

With all of the benefits proposed by the U.S. CDBC, the introduction of CBDCs could still cause hyperinflation and concentrate power with the government. We are living in a time when governments are continuously putting in place policies that will eventually, only recognize digital IDs such as vaccine passports, and now CBDC’s, which will be governed through a digital credit system. 

Will our future involve going to a national park requiring facial recognition? Or, the new Bobby Digitals, aka digital currency will be timed stamped like gift cards? The roll out these days is swift.

Duane Reed researches currency and market investments; and dibble dabbles in culture, grooming, news and travel.

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