The Fed opens the debate on a US central bank digital currency with a long-awaited report.
The Federal Reserve has taken a first step toward a more serious examination of central bank digital currency issuance, releasing a report on Thursday that examines the potential costs and benefits of the idea and opens the door for comment. public.
In a long-awaited report, the Fed avoided taking sides and laid out a list of arguments for and against a digital currency, and posed questions that will shape the debate.
“We look forward to engaging with the public, elected officials, and a wide range of stakeholders as we consider the positives and negatives of a central bank digital currency in the United States,” said Jerome H. Powell, Fed Chairman, in a statement. . Mr Powell had expected a report to be published in May 2021.
Central banks from the Bahamas to Sweden and China are experimenting with digital currency offerings, fueling concerns on Capitol Hill that the Fed could fall behind the competition. The rapid innovation in the private sector has suggested that the Fed, a key financial regulator, needs to understand budding private digital payment technologies.
A central bank digital retail currency would essentially be electronic money. While consumers are already using digital cash when they swipe a credit card or shop online, this cash is actually backed by the banking industry. A Fed version would be backed by the US central bank, much like a US dollar bill.
Given the dominance of the US currency in global finance, the Fed has made it clear that it is moving slowly and cautiously as it weighs in on a digital dollar. And officials stressed they would not move forward without congressional approval.
“The Federal Reserve does not intend to proceed with issuing a CBDC without clear support from the executive branch and Congress, ideally in the form of specific enabling legislation,” the report noted. .
Central bank researchers have explained how a digital currency could offer benefits and come with risks.
Such a currency “could provide a safe digital payment option for households and businesses as the payment system continues to evolve, and could lead to faster payment options between countries,” the Fed statement said. accompanying the working document.
But the paper also notes that a central bank digital currency would raise policy questions, including regarding its effect on the financial sector, the cost and availability of credit, the security and stability of the financial system, and the effectiveness of policy. monetary.
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The Fed document also appeared to slam the door on several possibilities, including the idea that a central bank digital currency could be created alongside consumer bank accounts at the Fed, which Democrats and proponents of broader financial inclusion have sometimes suggested.
The law behind the Fed “does not allow direct Federal Reserve accounts for individuals, and such accounts would represent a significant expansion” of the central bank’s role, the paper said, suggesting such accounts should be managed by private individuals. banks and other service providers. .
Commercial banks, for their part, fear that the creation of central bank digital currency and Fed accounts will strip them of their deposit base and disrupt their business model. The document likely doesn’t address all of their concerns, but may serve to allay fears that consumers might skip the traditional banking system altogether.
The Fed document pointed out that a potential banking currency could be designed in such a way as to mitigate disruptions in the banking system.
“A CBDC could spur innovation by banks and other players and would be a safer deposit substitute than many other products, including stablecoins and other types of non-bank currency,” the paper said. “These forms of non-bank money could cause deposits to shift away from banks, even without CBDC”
The Fed is seeking public comment on more than 20 questions about central bank digital currencies and accepting responses for the next 120 days.