The Federal Reserve has, for the first time, initiated a period of debate and public comment on the launch of a central bank digital currency to keep up with global financial innovation and maintain the dollar’s supremacy.
After months of anticipation, the Fed released an in-depth discussion paper on Thursday that will serve as the basis for what is expected to be a heated and consequential debate at the heart of the central bank in the coming months – although it made it clear it was not the case “for every policy outcome.” at this point.
“We look forward to engaging with the public, elected officials and a wide range of stakeholders as we explore the pros and cons of a central bank digital currency [CBDC] in the United States,” Fed Chairman Jay Powell said in a statement.
The Fed has been hesitant to launch a central bank digital currency in recent years, saying it would only do so if the benefits outweigh the costs. It is lagging behind authorities in China testing a digital renminbi. The European Central Bank has also made strides with the technology.
Powell has previously said that any CBDC should serve “as a complement to, and not a replacement for, private sector cash and current digital forms of the dollar, such as commercial bank deposits.”
“The Fed is finally venturing into an issue that is inevitable for central banks as they consider how to ensure monetary and financial stability in the face of various innovations in financial technologies, including an accelerating shift to digital payments, that are transforming financial markets and institutions be able. said Eswar Prasad, a professor at Cornell University with expertise in digital currencies.
The Fed is soliciting public comment on a potential CBDC over the next 120 days, and no decisions have yet been made on how it will be structured or whether it will be rolled out.
“While a CBDC could provide households and businesses with a secure, digital payment option as the payment system evolves and could lead to faster payment options between countries, there may also be downsides,” the Fed said.
“They include how to ensure that a CBDC maintains monetary and financial stability and complements existing means of payment. Other important policy considerations are how to protect citizens’ privacy and maintain the ability to fight illicit finance,” she added.
The Fed said it would not act without “clear support from the Executive Branch and Congress, ideally in the form of specific enabling legislation.”
Jan Hatzius, chief economist at Goldman Sachs, told the Financial Times during a panel hosted by the Chicago Council on Global Affairs earlier Thursday that the Fed is unlikely to be “very aggressive” in its plans to proceed if it does decide for it.
“There’s room for cautious adoption, but I don’t think they’re going to replace the core banking-centric system of financial intermediation anytime soon,” he said.
The Fed seemed braced for the risks, acknowledging that a CBDC could “fundamentally change the structure of the US financial system.” It pointed to the potential for bank funding costs to rise should bank deposits fall as an interest-bearing digital dollar became more widely available. This in turn could increase the cost of borrowing for households and businesses.
However, certain design parameters have been identified that could help avoid this outcome, including limiting the amount of CBDCs one could hold.
The Fed also said it would “best meet US needs” if the private sector offered accounts or digital wallets to “make it easier to manage” all related holdings and payments. They suggested that commercial banks and regulated non-bank financial services institutions could charge this fee.
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“Individuals, businesses and governments could potentially use a CBDC to make basic purchases of goods and services or pay bills, and governments could use a CBDC to collect taxes or make benefit payments directly to citizens,” the Fed said.
Inaction also has consequences, the Fed said. Failure to develop a US digital currency could undermine the country’s supremacy in global markets, the paper warned.
“It is important . . . to consider the implications of a possible future state where many foreign countries and monetary unions may have adopted CBDCs,” the Fed said. “Some have suggested that if these new CBDCs were more attractive than existing forms of US dollar, global use of the dollar could decline – and a US CBDC could help preserve the dollar’s international role,” she added.