FX Viewpoint | Stay tuned for a digital USD | Article – HSBC VisionGo
- Central banks are ramping up their efforts to test, design, and study digital currencies; where is the Fed on this journey?
- Project Hamilton and the Digital Dollar Project could provide some more insights into a potential digital USD shortly
- Even if the Fed were to issue a digital USD, full implementation may still be many years away, in our view
Major economies display growing interests in CBDCs, while the US seems to be still far from reaching a consensus on a digital USD
China and Sweden have been leading the way in developing central bank digital currencies (CBDCs) and others are showing greater interest. After a long consultation period, the European Central Bank is now starting to investigate what a digital EUR might look like, with the 2-year investigation phase starting in October 2021. On the contrary, the US regulators seem to be still far away from reaching a consensus on whether the benefits of a digital USD outweigh the costs, or the best way to design it. This indicates that the development of a US CBDC will lag other major central banks, in particular the People’s Bank of China’s e-CNY.
Project Hamilton and the Digital Dollar Project (working with the US authorities) focus on a potential digital USD
Nevertheless, the ball is now rolling. Project Hamilton and the Digital Dollar Project, having some working relationships with the US authorities, are focused on a potential digital USD. The former is a collaboration between the Federal Reserve Bank of Boston (Boston Fed) and the Massachusetts Institute of Technology (MIT), while the latter was cited by the US Senate Banking Committee on 30 June 2020.
The Boston Fed and MIT will release two policy papers, addressing CBDC coding challenges and on economic and design choices this month
Project Hamilton, launched in August 2020, has structured the research collaboration into work phases that extend over 2-3 years. The first phase will involve jointly building and testing a hypothetical CBDC for wide-scale, general purpose use. In later phases, researchers will assess technology trade-offs by coding and testing various architectures to see how they impact the CBDC’s design goals. Two policy papers are scheduled to be released this September, addressing issues on CBDC coding challenges and on economic and design choices (Financial Times, 5 August 2021).
The Digital Dollar Project will launch at least five pilot programmes to explore the future design of a digital USD
The Digital Dollar Project (The Project), a non-profit partnership between Accenture and the Digital Dollar Foundation started in January 2020, aims at encouraging research and discussions on the potential benefits of a digital USD. While the design details are limited, The Project announced that it will launch at least five pilot programmes over the next 12 months to gauge the value of and explore the future design of a digital USD, according to its press release in May 2021. The Project also expects the digital USD to take on the form of a tokenised, bearer instrument (in which no ownership information is recorded), issued by the Federal Reserve and distributed through the two-tier banking system. It argues that a digital USD should be easily accessible to all users, balanced between privacy protection and regulatory requirements, and able to transact offline within a close distance. It would also enhance and protect the USD’s reserve status.
Even if the Fed were to issue a digital USD, we believe full implementation may still be many years away
Currently, the Fed is still undecided over whether it should issue a digital USD, let alone when and what form it would likely take. Even if the Fed were to go ahead, we believe answering these questions will take time – meaning that full implementation may still be many years away.
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