Fed Prepares to Launch Review of Possible Central Bank Digital Currency

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Officials will issue a paper seeking public comment, but a decision on the government-backed cryptocurrency is unlikely to be made any time soon.

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Advocates say the Fed digital dollar could make it faster and cheaper to move money around the financial system, bring people who lack bank accounts into it and provide an efficient way for the government to distribute financial aid. Is.

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Another persuasive thought: In line with other major jurisdictions considering digital currency for domestic and international payments, the Fed. Governor Lyle Brainard said in remarks before the National Association for Business Economics on September 27.

“It is very hard for me to imagine that the US, given the dollar’s position as a major currency in international payments, would not come to the table with a similar type of offer under that circumstance,” she said.

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However, Fed Chairman Jerome Powell has indicated he sees reason to exercise caution. He added that due to the important global role of the dollar last month, bringing the digital dollar to market is more important than being the first.

He and other Fed officials have said the Fed’s research is preliminary and exploratory. He said in a press conference on September 22 that he would only consider issuing a so-called central bank digital currency—or CBDC—if he believed there were “clear and tangible benefits that outweigh any costs and risks.” Huh.”

Mr. Powell has pointed to other challenges, noting that many Americans actively use and prefer cash. He also added that there are privacy issues that need to be addressed, as the Fed CBDC system would theoretically allow central banks to see what each user did with the currency.

“It is our obligation to work on both technology and public policy to create a basis for making an informed decision,” he said last month.

Randall Quarles, the central bank’s facilitator on financial regulation, has expressed greater skepticism about the need for a Fed digital currency. He said this summer that the US dollar is already “highly digitized” and expressed doubts that a Fed CBDC would help bring people without bank accounts into the financial system — a goal that could be accomplished through other means, They said.

“I think we need to subject the promises of CBDCs to careful critical analysis before we move forward with innovation,” he said at an event organized by the Utah Bankers Association.

A report from the Philadelphia Fed warned that a US central bank CBDC could destabilize the financial system if people withdraw their money from banks, mutual funds, stocks and other investments and put it in the Fed’s ultrasafe currency.

Some banks — facing the prospect of competition from the Fed for deposits — have already indicated they don’t believe it is. Legal Rights To issue digital currency without authorization from Congress.

The Fed plans to launch the review by releasing a paper analyzing the issue and seeking public comment, but it is unlikely to include a firm policy recommendation.

Next, the Boston Fed, working with researchers from the Massachusetts Institute of Technology, is expected to release a more technical paper detailing how the digital dollar might work.

In theory, a Fed digital dollar could be used alongside traditional paper currency, but many of the details of how people will access digital dollars, and how they will fit into the financial system, are unclear.

For example, the Fed must decide whether consumers will access their digital dollars directly through a central bank or existing commercial lenders, said Richard Levine, president of fintech and regulation practice at Nelson Mullins Riley & Scarborough LLP.

Some advocates say that CBDCs can help improve the effectiveness of monetary policy by allowing central banks to directly change interest rates on accounts that hold the CBDC. This could allow central banks to bypass the often volatile financial markets and bring monetary policy to the retail level.

The Fed comes as central banks around the world struggle with the rise of many private electronic alternatives to traditional money and weigh in on creating their own versions. Private offerings of digital currencies have been highly volatile, and in many cases linked to criminal activity and have so far failed to gain widespread adoption for daily transactions such as buying groceries or movie tickets.

China created its own government-issued digital currency earlier this year and recently banned transactions using cryptocurrencies issued by non-monetary authorities, naming bitcoin, ether and Tether as examples. El Salvador, meanwhile, became the first country in the world to adopt bitcoin as a national currency alongside the US dollar.

Andrew Ackerman [email protected] . Feather

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