As digital currencies gather momentum, central banks around the world are exploring the potential advantages of implementing a central bank digital currency (CBDC). The U.S. Federal Reserve is no exception to this trend.
A central bank, like the U.S. Federal Reserve, oversees a country's currency, monetary policy, and commercial banking system. Fiat currency, such as the U.S. dollar or the Euro, is a government-issued form of money that is not backed by a commodity like gold but is still considered legal tender. The concept behind a CBDC is to introduce a digital form of fiat currency that is issued and regulated by a central bank. Monica Eaton, founder and CEO of Chargebacks911, highlights the overlooked missing requirement of consumer protection, a lacking mechanism but vital necessity for CBDC to be the digital asset of America's future.
Since a CBDC would typically be based on a blockchain model, it lacks an internal framework to recall individual transactions, making it virtually impossible to raise a dispute should a consumer feel swindled," said Eaton, whose company is the first global technology platform built to manage transaction disputes. "And, without basic purchase protections like we see with chargebacks for card transactions, it remains to be seen how fraud and purchase disputes will be resolved in this government experiment. Unfortunately for the government, unlike other enterprise organizations, there is a clear expectation for consumer protection, regardless of the technological barriers that exist natively."
The U.S. Department of the Treasury is actively examining the future of money and payments, particularly the conceivable implementation of a CBDC. To facilitate this, a dedicated CBDC working group has been established to create a broader policy perspective alongside the Federal Reserve's ongoing efforts. Recent remarks by the Treasury indicate that private entities will likely play a significant role in the CBDC implementation, driven by strong incentives to participate.(2)
At the same time, some lawmakers have introduced legislation that seeks to prevent the Federal Reserve from directly issuing a CBDC, potentially leaving room for private intermediaries to fill the gap. One such lawmaker is Senator Ted Cruz, who reintroduced a March bill prohibiting the Federal Reserve from developing a direct-to-consumer central bank digital currency. "The federal government has no authority to unilaterally establish a central bank currency," Cruz asserted. "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."(3)
The government is also exploring real-time payment systems, with the Federal Reserve's upcoming FedNow Service designed to enable near-instantaneous retail payments utilizing existing central bank money.(2) Overall, it is evident that the U.S. is actively pursuing new payment system options and weighing the possibilities for significant changes in the near future.
The Treasury is also considering the development of separate retail and wholesale CBDCs. Retail CBDCs are intended for use by the general public and are designed to replicate the function of cash in digital form. They provide individuals and businesses with a direct claim on the central bank, ensuring a safe and secure means of payment. Wholesale CBDCs are restricted to financial institutions and facilitate interbank transactions and settlements, enhancing the efficiency and resilience of payment systems. Wholesale CBDCs improve settlement reliability, while retail CBDCs provide secure electronic payments as an alternative to physical cash or traditional electronic payment methods. According to experts, both would mitigate risks and increase accessibility to financial services.(4)
For consumers, CBDC can enhance financial inclusion by providing access to digital financial services for individuals who may not have a traditional bank account. It can also improve payment systems, making transactions faster and more efficient while reducing service costs for consumers and merchants. A CBDC also encourages the development of innovative financial services and promotes technological advancements in the financial sector, creating new opportunities for merchants to offer innovative payment solutions.
While CBDCs are touted by some as safe and secure, there are still vulnerabilities. Because CBDCs are managed through a distributed ledger, aka blockchain, which the central bank controls, they have complete visibility into transaction records. This can compromise anonymity, threaten privacy, and increase the potential for adoption of a new social credit system.(5)
Central banks play an integral role in the regulation of CBDCs. As the issuer and regulator of its digital currency, they are responsible for setting the rules and ensuring compliance. However, it is important to acknowledge that regulators may not always possess an in-depth understanding of the underlying technology and its intricacies. Eric Hoffman, President of Interbank Solutions for Chargebacks911, says central banks should collaborate with experts in digital currencies and blockchain technology to address this knowledge gap. By leveraging their expertise, central banks can make informed decisions and develop robust regulatory frameworks that feature both innovation and security.
"Consumer protection is of paramount importance when it comes to digital currencies. While the traditional financial system has well-established mechanisms, like chargebacks for dispute resolution and consumer protection, the same cannot be said for digital currencies," says Hoffman, who also serves as the President of the Electronic Transactions Association. "Without appropriate safeguards, consumers are at risk of fraud and financial losses. Central banks, in collaboration with other regulatory bodies, should develop comprehensive consumer protection measures for CBDCs, such as establishing dispute resolution channels, setting clear guidelines for fraud prevention, and educating the public about the risks and benefits associated with digital currencies. Failure to provide adequate protection could erode public trust and hinder the adoption of any CBDC."
Eaton says that to foster innovation, governments should create an inclusive environment that encourages collaboration between established financial institutions, startups, and technology firms. By nurturing a diverse ecosystem, regulators can support the development of new and disruptive technologies while safeguarding fair competition and protecting consumers and merchants.
About Eric Hoffman
Eric Hoffman is a renowned global leader in the payments and financial technology space. Before taking on the position of President of Interbank Solutions and Board Member with Chargebacks911, Hoffman served as the Director of Apple Pay Business Development and was one of the first hires made by Apple in 2014 to scale Apple Pay. During his tenure with the company, he built and managed the business development payment partnerships teams responsible for driving the success of Apple Pay across the Americas. In his current role, Hoffman is tasked with leading new strategic initiatives and scaling out Chargebacks911's global go-to-market strategy. He is also the current President of the Board of Directors of the Electronic Transactions Association (ETA), playing an instrumental role in driving the organization's passion for advocacy and education and helping to guide the vision and policy agenda of the association for its extensive membership base.
About Monica Eaton
As an acclaimed entrepreneur, speaker, and author, Monica Eaton is widely recognized as a thought leader in the FinTech industry and a champion of women in technology. She established her entrepreneurial credentials upon selling her first business at the age of 19. When a subsequent eCommerce venture was plagued by revenue-leeching chargebacks and fraud, Eaton rose to the challenge by developing a robust solution that combined human insight and agile technology. Today, her innovations are used by thousands of companies worldwide, cementing her reputation as one of the payment industry's foremost experts in risk management, chargeback mitigation, and fraud prevention. Monica Eaton is honored to be the recipient of various industry awards. Her own expertise, as well as the services provided by her companies, has been recognized as outstanding by her peers and other industry leaders. Visit http://www.monicaec.com.
References
- Remarks by under secretary for Domestic Finance Nellie Liang during workshop on "Next steps to the future of money and payments." U.S. Department of the Treasury. (2023, March 2). home.treasury.gov/news/press-releases/jy1314.
- Durden, T. (n.d.). US Treasury introduces CBDC Working Group, discusses potential routes for digital dollar. ZeroHedge. zerohedge.com/crypto/us-treasury-introduces-cbdc-working-group-discusses-potential-routes-digital-dollar.
- "Sen. Cruz Introduces Legislation to Prohibit the Fed from Establishing a Central Bank Digital Currency: U.S. Senator Ted Cruz of Texas." Senator Ted Cruz, 21 Mar. 2023, cruz.senate.gov/newsroom/press-releases/sen-cruz-introduces-legislation-to-prohibit-the-fed-from-establishing-a-central-bank-digital-currency.
- Cointelegraph. (2023, January 9). Wholesale CBDC vs. retail CBDC: Key differences. Cointelegraph. cointelegraph.com/learn/wholesale-cbdc-vs-retail-cbdc-key-differences.
- Wang, A. (2022, December 30). CBDCs: Pros, cons, and Everything you ever wanted to know. Boxmining. boxmining.com/cbdcs-pros-cons-and-everything-you-ever-wanted-to-know/.
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SOURCE Chargebacks911
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