We're beginning to get some clarity from the White House regarding its approach to digital assets, including the potential development of a Central Bank Digital Currency (CBDC).
With the release of a wide-ranging report, the White House appears to be embracing digital assets and their potential for transparent, cost-efficient, and inclusive financial services. A background press call provided even more insight into the Biden Administration's thinking.
After taking some time to evaluate and process the materials, I have some initial thoughts about the White House's views and where we could be heading regarding a CBDC and other digital assets.
CBDC Research to Continue
Per the report, we're going full steam ahead with researching and developing a CBDC. There is an acknowledgment that it could facilitate efficient and low-cost transactions, might provide greater access to the financial system, and will help preserve US global leadership on monetary strategy.
At the same time, the White House intends to encourage the use of payment systems that exist or are under development. Specifically, we're talking about FedNow, set to launch next summer, and The Clearinghouse's RTP.
I believe the government will lean toward developing a wholesale solution, at least in the near term, because it would preserve much of the existing intermediaries. A retail CBDC could eliminate the need for payment rails like Mastercard and Visa, pose competition for existing bank deposits, and introduce privacy concerns. Thus, a retail CBDC will have more scrutiny, and development will move more slowly. I see a move to a wholesale CBDC occurring in the next 3-5 years. A retail CBDC will take longer to establish.
There's still the open question of whether the Federal Reserve needs Congressional approval to launch a CBDC. Current legislation on stablecoins has stalled in the House due to this specific item.
Oversight is Expected (and Needed)
To be sure, there will be more oversight and an effort to rein in fraudulent actors, which is greatly needed. I'm particularly pleased to see an international collaborative effort to fight ransomware (as referenced in the press call).
There will be a big focus on enforcement actions as the government looks to ensure that digital asset development safeguards privacy and advances equity. We've already seen enforcement actions from the Securities and Exchange Commission against initial coin offerings (ICOs) from a few years ago, and I expect they are just getting started.
Congress was already tasked by the President's Working Group on Financial Markets with making stablecoins safer, and I expect we'll see legislation passed next year.
Will the Commodities Future Trading Commission, the SEC, or another unnamed agency have oversight of digital assets? That remains to be seen. The CFTC and SEC were asked to clarify, review, and coordinate their efforts.
We should expect more research and reports from various federal agencies as the White House – like most of us – aims to learn even more about this fast-evolving payments alternative. An added emphasis is being placed on international, academic, and industry collaboration if it backs US "goals and values." I presume this includes the current administration's focus on environmental goals; thus, the digital asset industry will be encouraged to reduce its impact on energy consumption and greenhouse emissions.
The Bottom Line
We have long asserted that government intervention, in the form of rules and regulation, would cement digital assets as a mainstream component of the financial system. The White House Framework for Responsible Development of Digital Assets begins the work of moving us in that direction.
A commitment to more CBDC research makes it likely that the US will adopt private and public digital currencies – though public digital currencies might be a few years away. Financial institutions must continue their research and prepare for the shakeup if and when wholesale or retail CBDCs are introduced.
The Digital Assets Advisory practice at SRM keeps an eye on these developments. We are available to discuss what they could mean for your institution, and we'll keep you updated with changes as they transpire.