Forget CBDCs, Here’s Where the Biden Administration Needs to Focus in 2023

Rather than centralizing the digital dollar, lawmakers should focus on exploring a decentralized identification program and develop financial literacy programs for the general public.

AccessTimeIconDec 14, 2022 at 8:29 p.m. UTC
Updated Dec 15, 2022 at 2:31 a.m. UTC
AccessTimeIconDec 14, 2022 at 8:29 p.m. UTCUpdated Dec 15, 2022 at 2:31 a.m. UTC
AccessTimeIconDec 14, 2022 at 8:29 p.m. UTCUpdated Dec 15, 2022 at 2:31 a.m. UTC
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Cathy Yoon is the chief legal officer of MPCH Labs.

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Join the most important conversation in crypto and Web3 taking place in Austin, Texas, April 26-28.

This fall, the Biden administration in the U.S. released a framework outlining a potential way to regulate the emerging digital asset industry. The report also came with a proposal for studying a central bank digital currency (CBDC), which seems like the direction the whole world is heading.

Today, nearly every country with a central bank is studying or developing a CBDC, according to the Bank of International Settlements (BIS). At their best, CBDCs could advance certain national priorities like bolstering financial inclusion and simplifying tax collection.

That’s what the BIS suggests. What the “central bank of central banks” is less likely to say, however, is that there are significant downsides to concentrating even more monetary power in the hands of institutions like the U.S. Federal Reserve.

Cathy Yoon is the chief legal officer of MPCH Labs. This article is part of CoinDesk’s Crypto 2023.

A CBDC, which can be but is not necessarily built on a blockchain, would differ drastically from other forms of crypto assets because they are inherently centralized and permissioned by design. If the government is going to get involved in the digital money race, it should do so on the principles of openness and transparency.

The Biden White House’s proposed CBDC would likely be administered by the government and a coterie of banking partners in the old-fashioned, neoliberal tradition of public-private partnerships. Although CBDC boosters pay lip service to the ideal of “financial privacy,” there are still widespread and justified concerns over allowing the government to see the details of everyone’s finances on a minute-by-minute basis.

And, yes, it is true that a U.S. dollar-based CBDC would likely promote the international use of the dollar – thereby strengthening the currency against the Chinese digital yuan, which is being piloted today in no small part to one day bolster the Chinese Communist Party’s international “soft power” – this also comes with concerns.

To put it one way, CBDCs, at their core, are a tool that allows the government to fully politicize money. Today, no one can prevent you from spending the dollar bills in your pockets, because they are what’s known as a bearer instrument. A digital dollar would be programmable, meaning its functionality sits with those that can update the code.

A government, for instance, might be able to use a CBDC to incentivize citizens to purchase certain products, ban the trade of others and cut off individuals or businesses from their funds on a whim (like how police seize websites). With this kind of power at their disposal, it’s hard to imagine it would be utilized.

A CBDC would be a massive undertaking in the mold of Depression Era or post-war infrastructure projects. So-called megaprojects can be sources of national pride and catalysts of economic growth – like the interstate highway system. However, instead of developing a CBDC, it would be much more productive and impactful for the White House to focus on different kinds of financial initiatives to benefit the public good.

I propose, instead of throwing resources and tax dollars at a CBDC project, the Biden administration should investigate a decentralized identification program and develop financial literacy programs for the general public.

Expanding the reach of financial services for all Americans

Currently, access to financial services is often limited by geographical location, onerous know-your-customer (KYC) procedures and the U.S.’ embarrassing history of class and racial inequality. A new digital identification system could go a long way in improving this situation.

The idea of a digital identity (DID) is to allow for one’s identity to be proven and maintained in alternative ways. It could be a way to harmonize the hodgepodge of details that banks and financial institutions often require for setting up accounts, such as previous bank statements, proof of residency and utility bills – altogether known as personally identifiable information (PII).

Further, blockchain-based DIDs bring with them the benefits of blockchain-guaranteed immutability and censorship-resistance. The concept of decentralized identity existed well before Web3, and is closely related to the dream of self-sovereign identity (SSI).

At their core, DIDs and SSIs are about enabling citizens rather than centralized institutions to control their own information. What form they take is still being worked out (Jack Dorsey’s Block, for instance, wants to jump straight to “Web5” using non-blockchain “verified credentials”), but in either case would be a radical departure from the current record-keeping regime. Simplify identity management now!

Improving efficiency and security with blockchain technology

Decentralized finance (DeFi) is an emerging alternative to traditional finance without the middlemen. It offers many of the same services as Wall Street, including lending, credit and brokerage, but when done right it ensures that transactions are verifiable and platforms open for all.

While a number of of crypto’s centralized institutions disgraced the industry this year, DeFi proved its worth. None of the insider trading, theft of customer funds or preferential treatment seen at some crypto companies is possible when DeFi protocols are shipped correctly. Instead, these open financial platforms make everyone play by the same rules – and open the books for verification.

Regulators should embrace emerging technologies as a means to better allow market participants to become more efficient, cost-effective and secure. Blockchain, in conjunction with other cryptographic layers such as multi-party computation, could allow financial institutions to improve internal process management while also leaving a transparent and auditable trail as a means to provide assurances to customers, investors and regulators.

Regulators have a unique opportunity, working together with some of the brightest minds in the space to help steer technology that will inevitably help financial institutions, their customers and the economy become more streamlined and secure.

By developing smart regulations for smart contracts (rather than quashing it), the government can help erect ecosystem guardrails to make these admittedly sometimes-complex systems safer to use for everyone.

Considering the pace of digital adoption is not slowing, a digitally native and digitally secure financial system makes sense. More of the world’s assets will be tokenized. Regulators that nurture the development of new technologies will ultimately help the U.S. financial system become more prosperous than it has ever been.

Focusing on financial literacy

To some extent, the crypto industry is a mirror into the poor state of financial education. It’s a sad fact that scams proliferate across the industry, in no small part because many do not know basics of investing – and can be tricked into thinking an unsustainable yield farm is sound.

If individuals are empowered with financial education at a young age, they can be in a position to think critically on their own. The government, like crypto itself, should encourage people to do their own research – something that would remove the need for the government to nuke all of Web3.

Regulation and education have always walked together hand in hand: In just about every Securities and Exchange Commission enforcement action, for instance, the agency encourages people to think critically about what they invest in.

Financial literacy puts financial liberation in the hands of each and every individual. It’s essential to the evolution and improvement of any society and ultimately benefits the economy by encouraging sustained growth from the ground up.

If the Biden administration truly stands for making our financial system more secure and prosperous, it will shift its focus this coming year from creating a CBDC to realizing the massive potential that decentralized financial technology has today.

By empowering people and institutions alike through thoughtful regulations, improved security, and individual empowerment, the federal government can foster a new wave of financial well-being that truly benefits us all.


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Cathy Yoon is the chief legal officer of MPCH Labs.