Panel Debates Digital Currencies’ Purpose, Privacy, Governance, and Stability
Digital currency panelists Maureen O’Hara, Robert W. Purcell Professor of Finance at the Johnson School; Susan Joseph, Fintech at Cornell executive director; and Sarah Kreps, director of the Tech Policy Institute at the Cornell Jeb E. Brooks School of Public Policy
The digital currency market was thrown into turmoil in early June when two major cryptocurrency exchanges — Binance and Coinbase — were charged with violating securities laws by the Securities and Exchange Commission.
As their cases proceed through the courts, lawmakers and financial experts continue to debate whether the Federal Reserve should create a different type of digital money — a central bank digital currency (CBDC).
Eleven CBDCs, issued and backed by their countries’ central banks, have been launched around the world and 18 more are operating as pilot programs, said Maureen O’Hara, the Robert W. Purcell Professor of Finance at the Samuel Curtis Johnson Graduate School of Management. One of the best-known CBDCs is China’s digital yuan, launched in 2021.
The digital yuan, however, has not gained much traction because China already has an advanced system of electronic payments, O’Hara said, speaking at a digital currencies panel on June 9, during Reunion, at Sage Hall. There are also privacy concerns in China about data the CBDC is providing to the Chinese government.
“This involves having an account with your name at the central bank, so the Central Bank of China would be able to follow all of your purchases with your digital yuan,” she said. “So, no surprise, even the Chinese don’t want that.”
O’Hara said it is not clear that the United States needs a retail CBDC, which individuals would use to buy goods and services, particularly since the country is already a predominantly cashless society, with bills and coins representing only about 8 percent of payments. Moreover, retail CBDCs around the world are not being adopted extensively, and in Nigeria, the country’s CBDC is being used by only 1.5 percent of the wallets set up in the e-Naira, O’Hara said.
“So therein lies the big question: What problem is this going to solve?” she asked, adding that “there’s a more compelling case for a U.S. wholesale CBDC.”
A need for one set of rules via federal legislation
Creating a CBDC of any kind has become a polarizing political issue, with states rallying against it and passing laws that would make it illegal. Florida and Indiana have banned CBDCs and Louisiana, Alabama, North Carolina, Texas, and North Dakota have all drafted bills opposing a digital dollar.
“What the end result is, is I wouldn’t doubt that if there’s legislation that enacts it, you’re going to see a Supreme Court case that talks about it,” said Susan Joseph ’81, executive director of Fintech at Cornell.
As in China, there are concerns about the impact a potential CBDC could have on privacy. “There are some issues if the central bank knows what you’re doing, who you donate to, what you find interesting, and what your purchases are,” Joseph said.
Because the United States does not have a national privacy policy, states have the opportunity to enact their own privacy rules, which would likely lead to legal challenges, she said.
Establishing a CBDC, however, could offer several advantages, including allowing the government to quickly issue payments in the event of a pandemic and providing easier access to financial services.
In the crypto currency sector, continuing uncertainty in the industry stems in part from a lack of broad rules for digital assets established by the federal government. Instead, regulation is based on enforcement, with legal issues decided in court on a case-by-case basis.
“The digital industry would like some clarity and rules, and has been asking for it for years,” Joseph said. Before the SEC’s recent lawsuit against Coinbase, she added, the company sued the SEC in 2022 and asked that the agency create rules for the industry, but the SEC did not respond to the company’s petition.
Crypto as a haven for stability and security
Beyond the lack of rules, the government has been more reactive to issues in the fintech sector because of the rapid developments that have emerged in the industry over the past decade, said Sarah Kreps, director of the Tech Policy Institute at the Cornell Jeb E. Brooks School of Public Policy. Since 2010, nearly $100 billion in U.S. investment has flowed into fintech ventures, she said.
What Americans tend to lose sight of, however, is how much crypto activity is global, Kreps added. The top five countries with the highest level of crypto adoption are Vietnam, India, Pakistan, Ukraine, and Kenya; the United States is number 8, according to figures from the World Bank.
“In the rest of the world, this has been a haven for stability and security,” she said. “We know there’s a lot of turmoil in the crypto market. But it’s all relative. There’s comparatively less in crypto than in Turkey or in Vietnam or in Ukraine.”
In Ukraine, Kreps noted that crypto has become a mechanism for donations for humanitarian aid. “For Ukraine,” she said, “it has arguably been a real upside to be able to move money across borders to create an inflow to help Ukraine resist the Russian invasion.”
All photos by Chris Kitchen