ANALYSIS-U.S. Fed navigates policy minefield with impending digital dollar report

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Sept 30 (Businesshala) – The US Federal Reserve Board will soon issue a heated report exploring the potential adoption of a digital dollar, but its governor and other policymakers are divided on the issue – and much for the financial industry. At stake – the central bank will tread carefully.

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Concerned that the explosion in cryptocurrencies could weaken their grip on the economy, central banks from China to Europe are looking to issue their own digital currency (CBDC), and the Fed is under increasing pressure to hold.

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Unlike cryptocurrencies, which are typically run by private actors, or the electronic money used in the billions of transactions daily that are mostly created by commercial banks, few CBDCs are cash issued and backed by central banks. will be equal to.

CBDCs can be issued for wholesale use, to accelerate and reduce the cost of cross-border payments between corporations, and to expedite the settlement of stock and bond trades. A retail digital dollar can be used by the general public, increasing Americans’ access to a range of financial services.

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But US CBDCs also threaten the stability of the banking system, touching on privacy, security and cost concerns as well as foreign policy issues, at a time when Fed Chairman Jerome Powell is facing opposition from powerful people. Huh. Progressive MLA.

“There’s a lot of political minefield around central bank digital currency, which the Fed has to proceed very carefully,” said David Beckworth, senior research fellow at the Mercatus Center and former Treasury economist. It’s “politically smart” enough to navigate the competitive issues, added Powell.

In May, Powell announced that the Fed board would release a report exploring payment innovations and the potential adoption of a digital dollar, separate from the Boston Fed’s research with the Massachusetts Institute of Technology exploring the technical aspects of CBDCs. Has been doing.

Since then, Powell has said that he is “unsure” over the adoption of the digital dollar. “It’s such a fundamental issue, it would be ideal if it were the product of extensive consultation and ultimately asking Congress to authorize legislation,” he said during a congressional hearing on Tuesday.

Last week, he dashed hopes for a board report, saying the Fed has not made any decisions on CBDCs. He said the paper would tackle some related public policy issues and set the stage for the central bank to collect feedback from lawmakers and the public.

Still, Fed-watchers say the paper will play a key role in shaping the debate in Washington over the future of a digital dollar, and its language will be watched carefully to see which direction the board might lean, he said.

“No matter what they say, it’s going to be a very important setting of tone,” said Julia Coronado, founder of the research firm Macropolicy Perspectives, who testified before Congress in July on the need for a digital dollar. .

While enthusiasts expect the Fed to flag the risks of the digital dollar, they expect it to send a generally positive signal by outlining potential use-cases and benefits.

“If it’s more agnostic and more skeptical, who will take it forward?” Coronado said.

A spokesman for the Fed did not immediately provide comment.

digital rivals

While a widely used digital euro, yuan or dollar may be years away, such projects could dramatically disrupt the global financial system. Some in Washington worry that the United States will end its dominance of the global financial system if it does not digitize the dollar, which is currently the global reserve currency.

Notably, China’s digital yuan pilot project, which is in an advanced stage, has upset some that the United States’ biggest economic rival has stolen a march on a key innovation.

Fed Governor Lyle Brainard has said that he understands that the United States would not pursue the digital dollar when competing economies were moving forward with CBDCs. “It just doesn’t seem like a sustainable future,” she said in July.

However, others here are strongly skeptical. Fed governors Christopher Waller and Randall Quarles have argued that many dollar transactions are already digital and that the costs of adopting CBDCs may far outweigh the benefits. Employees within the Fed are also divided on the issue, according to three people briefed on the matter.

On Capitol Hill, some progressives see the digital dollar as a way to make financial services affordable for the millions of Americans who are currently outside the mainstream banking system. Meanwhile, some congressional Republicans have raised concerns about privacy and security.

Powerful business interests are also in the mix..

A digital dollar could hurt large lenders by intensifying competition for deposits, and some bank lobby groups are prompting policymakers to move more slowly. Major dollar-linked cryptocurrencies could be ousted from existence by a Fed rival.

Meanwhile, other private sector actors are pushing for a seat at the table, including distributed ledger companies, the US Chamber of Commerce and influential CBDC enthusiasts.

“I hope the report confirms the great American tradition of the public sector working with the private sector as policymakers develop the digital dollar,” said Christopher Giancarlo, a former regulator of the Digital Dollar Foundation and co-founder of the nonprofit. continue to do.” (Reporting by Jonal Marte and Michelle Price; Editing by Toby Chopra)

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