U.S. Far from Adopting CBDC, Fed Prioritizes Privacy Over Surveillance

While the U.S. holds firm in its distrust of CBDCs, other countries like the Philippines and Hong Kong are embracing the opportunity to explore the benefits of this technology.

Federal Reserve Chair Jerome Powell once again pointed out the U.S.'s very cautious approach towards adopting a central bank digital currency (CBDC), mostly due to concerns about privacy and the necessity for congressional authorization. In contrast, the Philippines and Hong Kong are making strides in their CBDC initiatives, with the Philippines exploring a wholesale CBDC (wCBDC) through Project Agila to democratize access to investment instruments and the Hong Kong Monetary Authority (HKMA) launching Project Ensemble to explore tokenization and the potential of a wCBDC.

No Immediate Plans for U.S. CBDC

Federal Reserve Chair Jerome Powell made it very clear in a Senate Committee on Banking, Housing, and Urban Affairs hearing on Mar. 7 that the United States is very far from adopting or even recommending a central bank digital currency (CBDC).

Powell made it a point to highlight the Federal Reserve's complete disinterest in a CBDC model that would enable user surveillance, also pointing out concerns over privacy and the potential for government monitoring of transactions. Using China's digital yuan as an example, he stated that the U.S. would not endorse or propose a system that infringes on citizens' privacy. Furthermore, he mentioned that if the Fed were to consider a CBDC, it would operate through the banking system, which means that only banks should hold accounts at the Fed to prevent direct surveillance and involvement with individuals' finances.

The Fed chair also pointed out that any move towards a U.S. CBDC would require congressional authorization, responding to some concerns raised by Senator Cynthia Lummis about the Fed launching a CBDC without legislative approval.

Globally, the adoption of CBDCs is rapidly increasing, with 11 countries having launched their own and several others in various stages of development or trial. Notably, President Joe Biden previously signed an executive order in March of 2022, urging the Fed to explore the potential for a U.S. CBDC. Despite international trends and exploratory mandates, Powell's comments clearly indicate a deliberate and privacy-focused consideration of digital currencies in the U.S. financial system.

Philippines Exploring a wCBDC

Meanwhile, The Bangko Sentral ng Pilipinas (BSP) is moving forward its exploration of a wholesale central bank digital currency (wCBDC) through Project Agila, which is expected to conclude by the end of the year. BSP Deputy Governor Mamerto Tangonan emphasized the project's role as a learning exercise that is aimed at democratizing access to securities and investment instruments.

By allowing purchases in smaller issue sizes with much lower fees, the initiative can make securities ownership much more attainable for the average Filipino. Six domestic banks, including BDO Unibank, China Banking Corp., Land Bank of the Philippines, Rizal Commercial Banking Corporation, Union Bank of the Philippines, and Maya Philippines, are collaborating with the BSP in this pilot, utilizing the wCBDC for fund transfers among banks. The project also aspires to evaluate the wCBDC's potential in facilitating high-value services like securities settlement.

The decision to focus on a wholesale CBDC stems from concerns around bank disintermediation and related issues that could arise with a retail CBDC. Unlike many digital currencies, the proposed wCBDC will not rely on blockchain technology.

The Philippines' interest in a CBDC was first announced in 2020, with the BSP Monetary Board expressing a positive initial assessment and starting with pilot tests in 2022 under Project CBDCPh. Additionally, in 2023, the Philippines was also part of a pilot study with the Digital Dollar Project, Western Union, and BDO Unibank to explore a retail CBDC for remittances in an effort to reduce costs and enhance transparency and competition, though challenges in transaction speed were noted.

Hong Kong's Digital Currency Leap

The Hong Kong Monetary Authority (HKMA) is also taking a big leap forward with the launch of Project Ensemble, an initiative that is focused on exploring the potential of a new wCBDC to facilitate tokenization. The initiative is not just about creating a digital currency but is deeply invested in researching and testing the tokenization of real-world assets like green bonds, carbon credits, and electric vehicle charging stations, among others.

Project Ensemble will kick off with the development of a sandbox environment, a testing ground for tokenization use cases that promise to revolutionize how people deal with assets and settlements.

One exciting aspect of this initiative is the formation of the wCBDC Architecture Community. This group will include a mix of local and multinational banks, key industry players, and the HKMA’s CBDC Expert Group, which includes 11 academics from various fields and universities in Hong Kong. The project will clearly encourage collaboration, not just locally but with central banks and international organizations globally, to enrich the development and implementation of the wCBDC.

The HKMA's chief executive has also extended an open invitation to global talents and industry players to join Hong Kong's ambitious tokenization journey. Although there's no mention of the Bank for International Settlements' direct involvement in Project Ensemble, the HKMA has been actively participating in other BIS projects and conducting experiments with local and Chinese banks to explore the possibilities of digital currencies and tokenization.

In parallel, the HKMA has also released guidance on the sale and distribution of tokenized products not regulated by the Hong Kong Securities and Futures Commission, which is a very clear indicator that the country is making it a priority to embrace digital assets and currencies.