Independent Banker - January 2021 - 56

exploring the options for a fully digital solution
that complements existing payment types.
In fact, that's the basis for the collaborative
work between the Federal Reserve Bank of
Boston and MIT. This multiphase research effort
will include building and testing an American
CBDC with a focus on speed, security, privacy
and resiliency. They plan to publish their
findings publicly, and the first research paper
and open source license for code is anticipated
by the middle of this year.
" The work we're doing, Project Hamilton,
is technical research, " says Jim Cunha, senior
vice president of secure payments and fintech
at the Federal Reserve Bank of Boston. " We're
trying to determine the current and emerging
technologies that can handle the unique
requirements of a CBDC for the U.S. " Cunha
adds that there has been no decision yet to move
to production or to a pilot program. " Our goal is
to get smarter on this technology and the unique
requirements of a central bank digital currency,
and the trade-offs therein, " he says, " particularly
if a decision is made to do so in the future or if
we are directed to via legislative action. "
Why now?
Given that the first form of digital currency,
bitcoin, has operated for more than a decade,
this newfound attention on CBDC seems to
have emerged with a surprising urgency. Yet, a
multitude of market developments have drawn
the attention of central banks on a global scale,
particularly the launch of Libra, Facebook's
proposed digital currency.
When the Libra Association-a group of tech,
venture capital and other entities-released its
white paper in June 2019, there was a flurry of
activity. In the U.S., hearings were hosted by
both the Senate Banking Committee and House
Financial Services Committee within days of
the announcement. And as Federal Reserve
chairman Jerome Powell pointed out at that
time, the sheer size of Facebook's network would
raise Libra to systemically important levels.
" The Libra white paper ... really caught the
attention of central bankers and regulators, "
says Brian Laverdure, vice president of
payments and technology policy at ICBA.
" Given the potential of it becoming systemically
important just like that, [the Federal Reserve
was] concerned about what it could mean to
national currencies and the ability to affect
monetary policy. "
56 Q ICBA Independent Banker Q January 2021
$162
million
in digital wallet
transactions were
made as part
of the People's
Bank of China's
digital currency
pilot program
But Libra alone didn't light the fire under
central banks to explore a digital currency.
Cunha believes there are three main reasons
for this increased attention. The first, he says,
is China's release of its digital currency project.
The second is the adoption and release of
private-sector stablecoins (cryptocurrencies
that peg their market value to some external
reference, such as the dollar or the price of gold),
such as Libra. Finally, countries are moving
toward digital currencies for policy reasons,
including the reduction in physical cash usage.
Initiatives like the Digital Dollar Project have
added fuel to the fire. A joint collaboration
between Accenture and the Digital Dollar
Foundation, this program advocates for a U.S.backed
digital currency. It launched in January
2020 with a project brief that outlines the
case for and principles of a digital
dollar. And since that time, the
project has released a white paper
detailing the benefits of CBDC and
a summary of proposals for nine
distinct pilots to assess CBDC's use
cases and viability.
What you need to know
CBDC has certainly attracted a
lot of financial industry attention,
but with investigations in their
nascence, what's the takeaway for
community banks today?
First and foremost, community
bankers should get up to speed on
this technology and all that it offers.
" Like the early days of the internet,
do your homework and stay abreast
of developments, " Cunha says. " It
was hard to predict in the early
days of the internet how it would
impact banks, but it did in many
ways. [With CBDC], at some point, you'll need to
understand what policy decisions were made, if
there is a particular role the banking community
will play and how you will integrate that into
your product mix. "
In addition to forward-thinking product
planning, community bankers should stay
on top of regulatory developments and
guidance on broader digital currency and
cryptocurrency topics. For example, the Office
of the Comptroller of the Currency (OCC) issued
an interpretation that clarifies the ability for
community banks to provide services to issuers
Independent Banker - January 2021

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