The Fed Is Pondering Its Own Crypto. Politics Are Standing in the Way.

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The Federal Reserve, chaired by Jerome Powell, is evaluating a digital dollar.

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Win McNamee/Getty Images

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While some countries charge ahead with plans to issue digital money, in the US the prospects for a central-bank digital currency are looking increasingly remote.

On Wednesday, a letter signed by every Republican on the House Financial Services Committee went to Federal Reserve Chair Jerome Powell, expressing concerns about how a digital currency could affect banks, monetary policy and privacy rights. It came in advance of a hearing on the topic scheduled for next Thursday.

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Republicans’ concerns are important because Fed officials have strongly suggested they need a new law authorizing a digital currency’s issue. In a divided Congress, without support from the GOP, a US project couldn’t move forward.

The Fed itself is still in the early stages of evaluating whether a digital dollar makes sense. In January, it released a white paper with potential pros and cons of the project with public comment due Friday. At the same time, a team at the Boston Fed has worked on code that could underpin a digital dollar if the US chose to move forward.

Of course, most dollar-denominated commerce already occurs digitally. Unlike bank deposits, which are liabilities, a digital currency would essentially be a digital form of a bank note. Consumers could potentially hold the dollars in wallets on a phone, pay a merchant with a simple scan, and transfer the money instantly with little or no cost. Some proponents of the idea think a digital currency could increase financial inclusion for unbanked Americans or lower the cost of international money transfers, among other potential use cases.

According to the Atlantic Council, 87 countries representing more than 90% of world gross-domestic product are exploring a digital currency. The major economy that is the furthest along is China, which is already allowing some citizens to use a digital yuan.

China’s lead on the matter has been a major concern in the past for Republicans, some of whom claimed the digitization of the yuan could make it a threat to the global dominance of the dollar.

However, more recently, some Republicans have suggested that the private sector, through the development of dollar-denominated stablecoins, should take the lead.

The House Republicans’ letter echoed that view, calling stablecoins a “potential cornerstone of a modern payment system.” The letter also expressed doubt that a digital dollar would increase financial inclusion, concerns that it could diminish privacy, and concerns about the impact on monetary policy.

If political gridlock reins, the clear winners are dollar-denominated stablecoin providers, like Circle Internet Financial and Paxos Trust Co. Those companies are facing problems of their own as US agencies and lawmakers try to determine how they should be regulated, but they already have a working digital-dollar product. Circle is seeking to go public through a SPAC merger with Concord Acquisition Corp,
(ticker: CND), pending approval by the Securities and Exchange Commission.

Republicans may yet come around to the idea of ​​a digital dollar, and the Fed will still be able to continue down the road of developing research and technology while it waits for lawmakers to pull the trigger. But for now, political gridlock could put a US digital currency out of reach.

Write to Joe Light at [email protected]


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