The central bank’s ability to influence the economy through measures such as adjusting interest rates may be impacted. Additionally, the potential for increased financial surveillance raises ethical questions about individual privacy and the power of governments and institutions over financial transactions. Central bank digital currency is a claim on the central bank, which is accessible by a wide range of customers, digital, flexible and potentially interest-bearing. The new asset is being researched in many countries, and widening the accessibility of financial services, creating the digitalized form of cash with monetary policy considerations being among its motivations. An interest-bearing central bank digital currency could make the central bank’s monetary transmission direct, which could improve the efficiency of monetary policy.
Customer funds need to be safe and protected from runs like the one that took down Lehman Brothers investment bank. In part, this calls for legal clarity on what kind of financial instruments stablecoins represent. Many also offer redemption guarantees at face value – a coin bought for ten euros can be exchanged back for a ten-euro note (a sort of money-back guarantee). The primacy of the U.S. dollar has provided the United States unrivaled power to impose crippling economic sanctions—which states including Iran, North Korea, and Russia are increasingly using cryptocurrency to evade. Meanwhile, terrorist groups such as the self-proclaimed Islamic State, al-Qaeda, and the military wing of the Palestinian organization Hamas also traffic in cryptocurrency.
To their proponents, cryptocurrencies are a democratizing force, wresting the power of money creation and control from central banks and Wall Street. Critics, however, say that cryptocurrencies empower criminal groups, terrorist organizations, and rogue states while stoking inequality, suffering from drastic market volatility, and consuming vast amounts of electricity. Regulations vary considerably around the world, with some governments embracing cryptocurrencies and others banning or limiting their use. As of January 2024, 130 countries, including the United States, are considering introducing their own central bank digital currencies (CBDCs) to compete with the cryptocurrency boom. A U.S. central bank digital currency (CBDC) would be a tokenized and blockchain-based version of the U.S. dollar, maintained and issued by the Federal Reserve.
U.S. and European authorities have shut down a number of so-called darknet markets—websites where anonymous individuals can use cryptocurrency to buy and sell illegal goods and services, primarily narcotics. Critics say these enforcement efforts have fallen short, exemplified by the theft of more than $1 billion in cryptocurrency by a North Korean hacking group in 2022. In March 2022, Biden directed the OSTP, in partnership with other institutions, to scrutinize and come up with a viable answer to the question of digital assets and a U.S. The White House placed urgency on creating a digital dollar, outlining plans to guide its creation. The rise of meme coins reflects the power of internet culture in shaping financial markets, but their sustainability remains questionable. Meme coins, as the name suggests, are cryptocurrencies inspired by internet culture, often created as jokes or community-driven projects.
A U.S. CBDC will be centralized and under the purview of the Federal Reserve, the U.S. central bank. A U.S. CBDC should safely meet future needs for payment services and be free of credit risk and liquidity risk for the public. Forms of money have continually evolved since the days when people accepted seashells for payment. Regulation, improved security and institutional involvement will help shape the future of crypto.
The research indicates that trust is a crucial factor in the acceptance of digital currencies; without robust security measures and clear regulatory frameworks, the public may remain hesitant to embrace this new form of money. Many governments have taken a hands-off approach to crypto, but its rapid ascent and evolution, coupled with the rise of DeFi, has forced regulators to begin crafting rules for the emerging sector. Regulations vary widely around the world, with some governments embracing cryptocurrencies and others banning them outright. The challenge for regulators, experts say, is to develop rules that limit traditional financial risks without stifling innovation.
