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The Central Bank Digital Currency Marches On

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Barbara L. Neuby
April 17, 2023

In the first column of this series, I reported on the larger issue of the coming currency change called the “central bank digital currency” (CBDC). Project Hamilton was phase one of this future system that provides proof of concept work to operate an instant transaction algorithm for bank-to-bank transfers that can complete 100,000 transactions per second without error. Project Cedar is the second stage of this digital currency effort and recently completed transactions of pairs of foreign currency in what is known as the foreign currency market, or “FOREX.”  Project Cedar proved that millions of financial transactions can be completed instantly between global partners. Roughly 100 countries are working on their digital currency systems as well.

Why is this a public administrative issue? Why should public administrators care? Administrators must care because, at some point in the not-too-distant future, this digital currency system will be adapted for use in other types of transactions: the retail world and the public benefit realm.

While Project Cedar was in its last stages of completion, President Biden issued Executive Order 14067 that ordered the Office of Science and Technology Policy to study the purposes and technical needs of a U.S. CDBC. Various white papers have been written for that purpose. The report, Technical Evaluation for a U.S. CBDC System describes how the system will be used to protect consumers and businesses financially and digitally and bring those into the banking system who have never had an account.

The U.S. government has definite ideas for CBDCs as a way to make benefit payments or receive funds in a variety of situations. The IRS may take tax payments or issue refunds via a CBDC system, the Department of Agriculture might disburse child nutrition benefits using CBDCs or the Department of Health and Human Services may reimburse healthcare providers and provide allotments to states with CBDC. The CBDC payment and reimbursement system will have huge impacts on Medicare and Medicaid. Members of the military could be paid using a CBDC. State road contracts through the Department of Transportation could be paid for using CBDC. Each of these services or benefits will become an administrative project for the agency that has jurisdiction over that issue.

For many government benefits there is already a requirement that payments be made electronically like Social Security, and there are cases in which CBDC could provide a unique benefit—such as the stimulus checks quickly issued during the COVID-19 pandemic. In addition, use of a CBDC system could bring individuals who do not have a bank account into the financial system through the new “digital wallet” function. Furthermore, when payments need to be adjusted, the CBDC system is programmable so as to accommodate rapid change.

Several substantial issues will need to be solved: the lack of architecture and software; cybersecurity and privacy; the lack of talent; and managing a gargantuan transition process. Then, from where does all this architecture and software come? Moving to a CBDC sounds like the “Microchip-Producers Full-Employment Act.” China and Taiwan will appreciate this additional business as will all the circuit board makers around the world. At present, banks use traditional hardware and software to operate credit and debit cards as the primary means of both retail purchases and government benefits by settling a “batch” account at the end of each business day. This process is slow and deemed cumbersome and inefficient. One of the benefits of moving all retail and benefit transactions to a CBDC environment is speed and history. Medicaid physicians will be paid instantly instead of the several months required now. Those depending upon various forms of social assistance will receive their benefits faster and governments that are owed payments should not have to wait the customary 30 to 60 days. All transactions are settled in less than 15 seconds according to Project Cedar, and a history of every transaction will be recorded.

However, government offices at the federal level have long established routines and procedures for every action taken. Most of these routines have been in place for decades. The same is true at the state and county level, but perhaps less so at the municipal level. Many big cities are at the forefront of technological adaptation while other cities are not technologically savvy. The central question is how will hundreds, if not thousands, of federal and state offices adapt to a new system with new hardware, software and new processes in a seamless implementation of the changeover from a dollar-based cash, credit and debit system to one entirely embedded in something called a central bank digital currency? For that answer, we wait.

Author: Barbara L. Neuby Ph.D. is a Professor of Public Administration at Kennesaw State University in Kennesaw, GA. She teaches and researches in the budgeting, public finance, and homeland security areas, and in her spare time is a numismatist.

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