The Fed says the digital dollar could ‘fundamentally change’ the US financial system, but it’s not ready to issue one yet



The Federal Reserve released its long-awaited report on the prospect of creating a central bank digital currency, or CBDC, on Thursday, outlining the potential pros and cons of what could be a “very significant innovation in U.S. currency,” but pausing before taking a position on its implementation without the help of lawmakers.


In its 40-page report, the Fed said a CBDC, which effectively combines the efficiency of cryptocurrency transactions with the guarantees of a central bank-backed asset, could “fundamentally change” the structure of the system. financial institution by changing the roles of the central bank and the private sector.

The report, written by the seven-member Fed Board of Governors, says a widely available CBDC would serve as a “near-perfect” substitute for commercial bank money, so much so that its implementation could reduce the amount of deposits in the banking sector. the cash that banks rely on to fund loans.

The authors then write that the design choices of a CBDC could help alleviate these concerns, pointing out that a CBDC that bears no interest would help deter consumers from cashing out their deposits in favor of digital dollars.

Rather than coming to a conclusion on the launch of a Fed-backed CBDC, the officials said they take “no position on the ultimate desirability of a US CBDC” and instead called the report “ first step” in the decision-making process; so far, China is the only major economy to actively test a CBDC.

The Fed is seeking public comment on the matter for a 120-day period, but has refrained from outlining any potential action afterward, except to note that the Fed “does not intend” to issue a CBDC without “clear support” from the executive branch and Congress – “ideally in the form of specific enabling legislation”.

A small handful of lawmakers, including Sen. Pat Toomey (R-Pa.), have expressed support for a digital dollar in recent months, but the issue has yet to gain traction in Congress despite President Joe Biden reportedly referred the matter to the legislature. branch in November.

To monitor

On Tuesday, Alan Lane, CEO of publicly traded crypto bank Silvergate Capital, said the launch of a US CBDC was “probably years away,” telling analyst David Chiaverini on an earnings call that the central bank had made it clear that officials would not. rush on the subject.

Key Context

Booming institutional adoption has taken the world’s largest cryptocurrency to meteoric new heights this year, but bitcoin’s underlying technology has also sparked interest from central banks looking to forge their own digital currencies. . About 86% of central banks around the world are actively exploring the development of central bank digital currencies (CBDCs) in an effort to “defend their turf against cryptocurrencies,” Bank of America analysts said in a recent note to the clients. For his part, however, Powell remained cautious about the Fed’s timing, saying last summer that the central bank was “looking very carefully at whether we could issue a digital dollar,” but adding, “We don’t We don’t need to be the first. We have to get it right.

crucial quote

“The introduction of a CBDC would represent a very significant innovation in American money,” Fed officials wrote in the report. “As a result, broad consultation with the general public and key stakeholders is essential.”

Further reading

Crypto Bank Silvergate (SI) Sees Any Fed Digital Currency Launch Years Away (Bloomberg)


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