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What Will a U.S. Central Bank Digital Currency Look Like? – Investopedia

The U.S. central bank digital currency (CBDC) will be the digital or electronic form of the U.S. dollar issued by the Federal Reserve. This form of digital fiat money will be similar to cryptocurrencies, but the fundamental difference will be that a CBDC will be backed and regulated by the Federal Reserve and act as a legal tender.
With a future U.S. CBDC, the public could use another form of central bank money besides physical cash and digital balances held in individual or corporate bank accounts. The United States doesn’t currently have a CBDC, but with this option under discussion, it is important to understand what will be a U.S. CBDC, the benefits and risks attached, and the current steps toward implementation.
Forms of money are continually evolving, as they have since the days when people accepted seashells for payment and a gold standard existed to the arrival of fiat currency. Digital currencies are yet another money metamorphosis.
Fiat currency is a government-issued currency not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. This type of money is the dominant means of making transactions in most countries. People use it to facilitate the exchange of goods and services in an economy. The central bank issues fiat currency for the nation’s use; in the U.S., the Federal Reserve plays this role.
A U.S. CBDC will serve as a complement to existing central bank reserve account balances and widely used fiat currency, but, as a bonus, it should provide a medium for executing instant and seamless cross-border transactions. 
On Sept. 16, 2022, the White House released a framework outlining the regulation of digital assets to explore the digital dollar. Even the Federal Reserve acknowledges the technological innovation of digital assets as a form of money. Despite understanding the potential, the Fed warns that there are risks that might leave customers vulnerable to theft and fraud. A U.S. CBDC would present similar pros and cons.
Before launching a U.S. CBDC, the Fed must be satisfied that it is a safe digital asset accessible to the public, that it’s without credit and liquidity risks, and that it’s privacy-protected, intermediated, transferable, and identity-verified. More specifically:
The Federal Reserve’s goals for a CBDC take into account households, businesses, entrepreneurs, and consumers by offering more uses and efficiency than fiat or other supplementary monetary options.
Before the U.S. issues a digital currency to the public, specific requirements must be satisfied. Some of these, developed through years of intensive study by policymakers and Federal Reserve staff, include:
The Federal Reserve has identified the advantages and disadvantages of having a CBDC in circulation. The following are some of the key benefits and risks:
A U.S. CBDC should safely meet future needs for payment services and be free of credit risk and liquidity risk for the public. 
However, a U.S. CBDC could affect the current financial structure of the U.S. and alter the duties and responsibilities of the private sector and the central bank. 
The White House Office of Science and Technology Policy (OSTP) and President Biden have worked together on launching a U.S. CBDC. The president’s interest was explicit when he shared the importance of using technology “to advance democracies to lift people up, not to hold them down.”
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. CBDC. The White House placed urgency on creating a digital dollar, outlining plans to guide its creation. 
The framework took six months and the collaborative efforts of several federal agencies. It contained three core aspects: 
The policy objectives for a U.S. CBDC system require that the CBDC expand equitable access to the financial system, preserve the role of physical cash, and collect only strictly necessary data. The framework also emphasized ensuring that the U.S. CBDC fosters a greener environment and provides excellent customer experience. These policy objectives formed the foundation for the currency’s technical design choices.
The framework also pointed to the need for technical experts with good knowledge of money and payment systems to oversee the technology involved in building the U.S. CBDC. Finally, the framework’s digital assets R&D plan is concerned with how cryptography technology can help develop a CBDC that matches the Federal Reserve’s mission.
Eleven countries have concluded their risk and benefits studies on the effects of a CBDC on their economies and have implemented one as a supplement to their existing monetary systems. The 11—mostly small, island countries—are the Bahamas, Antigua and Barbuda, Anguilla, St. Kitts and Nevis, Montserrat, Dominica, Saint Lucia, St. Vincent and the Grenadines, Grenada, Jamaica, and Nigeria. 
As of September 2022, 105 countries were piloting, researching, developing, or otherwise exploring a CBDC initiative for their economies.
Canada, France, China, India, and South Korea are among the many countries studying or testing a CBDC. The level of interest has grown quickly: In May 2020, just 35 countries developed an interest in the possibility of having a CBDC.
It is easy to confuse a CBDC and cryptocurrency, but they aren’t the same. A U.S. CBDC will be centralized and under the purview of the Federal Reserve, the U.S. central bank. On the other hand, cryptocurrency is decentralized, without any governing body, giving users more control. Also, cryptocurrencies run on distributed ledger technology, meaning that multiple devices all over the world, not one central hub, are constantly verifying the accuracy of the transaction.
The U.S. central bank digital currency (CBDC) won’t replace the U.S. dollar. Rather, it will complement physical cash by opening more payment options to select from. According to the Federal Reserve, a CBDC is “not to reduce or replace [U.S. dollars].”
The U.S. CBDC will be backed and controlled by the Federal Reserve. The central bank will issue the digital currency, and it will be accessible through digital wallets from intermediaries such as banks.
A U.S. CBDC should improve cross-border payments and use technology in a simplified distribution channel for such payments, as well as allow for transactions among different jurisdictions.
Federal Reserve System. “Money and Payments: The U.S. Dollar in the Age of Digital Transformation.”
Federal Reserve System. “Money and Payments: The U.S. Dollar in the Age of Digital Transformation,” Page 1 (Page 5 of PDF). 
Federal Reserve System. “Money and Payments: The U.S. Dollar in the Age of Digital Transformation,” Pages 13–14 (Pages 17–18 of PDF).
Federal Reserve System. “Central Bank Digital Currency (CBDC).”
Federal Reserve System. “Money and Payments: The U.S. Dollar in the Age of Digital Transformation,” Pages 15–20 (Pages 19–24 of PDF).
The White House. “Remarks by President Biden at the Summit for Democracy Closing Session.”
The White House. “Fact Sheet: President Biden to Sign Executive Order on Ensuring Responsible Development of Digital Assets.”
The White House. “Technical Possibilities for a U.S. Central Bank Digital Currency.”
Atlantic Council. “Central Bank Digital Currency Tracker.”
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Finance specialist with courses ranging from corporate finance, perfonal finance and startup finance. Msc. Acturail Science, Bsc. Finance, COP Insurance and phD. Business Advministration -FInance(ongoing)