Fed prepares review of possible central bank digital currency

WASHINGTON – The Federal Reserve plans to review the potential benefits and risks of issuing US digital currency earlier this week as central banks around the world experiment with the potential new form of money.

Fed officials are divided on this matter, making it unlikely that they will decide anytime soon whether to create a digital dollar. Unlike private cryptocurrencies like Bitcoin, a Fed version would be issued and supported by the US Federal Reserve, a government agency, as would US dollar bills and coins.

Proponents say a Fed digital dollar could make it faster and cheaper to move money around the financial system, get people without bank accounts in it, and provide an efficient way for the government to distribute financial aid.

Another motivating consideration: Keeping up with other major jurisdictions that are considering digital currency for domestic and international payments is up to the Fed. Governor Lael Brainard said in a statement to the National Association for Business Economics on September 27th.

“I can hardly imagine that, given the dollar’s status as the dominant currency in international payments, the US would not come to the table with a similar offer under these circumstances,” she said.

However, Fed chairman Jerome Powell has indicated that he sees cause for caution. He said last month that getting the digital dollar right was more important than being the first to hit the market, in part because of the dollar’s critical global role.

He and other Fed officials said the Fed’s research is early and exploratory. He said at a news conference on September 22nd that they would only consider issuing what is known as central bank digital currency – or CBDC – if they believed there were “clear and tangible benefits that outweigh all costs and risks.”

Mr. Powell pointed out other challenges and indicated that many Americans actively use and prefer cash. He also said there are privacy issues that need to be addressed as a Fed’s CBDC system would, in theory, allow the central bank to see what each user has been doing with the currency.

“It is our duty to work both technology and public order in order to provide a basis for an informed decision,” he said last month.

China created its own currency earlier this year and recently banned transactions in cryptocurrencies issued by non-monetary authorities.


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Randal Quarles, the central bank’s top man on financial regulation, has been more skeptical about the need for a digital Fed currency. He said earlier this summer that the US dollar was already “highly digitized” and expressed doubts that a Fed CBDC would help draw people without bank accounts into the financial system – a goal that could be achieved by other means. he said.

“Before we get carried away with the novelty, I think we need to carefully and critically analyze the promises of a CBDC,” he said at a Utah Bankers Association event.

A Philadelphia Fed report warned that a US Federal Reserve (CBDC) could destabilize the financial system in a crisis if people pull their money out of banks, mutual funds, stocks and other investments and put it in the Fed’s ultra-safe currency.

The Federal Reserve is trying to figure out how to keep cash relevant in a cashless world. It is considering digitizing the U.S. dollar, giving people money to access on their phone, and bypassing electronic payments, which can be slow and costly for businesses. Image: Jacob Reynolds / WSJ

Some banks facing the prospect of competition from the Fed for deposits have already signaled that they do not believe they have the legal authority to issue digital currency without congressional approval.

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

Next, the Boston Fed, in collaboration with researchers from the Massachusetts Institute of Technology, is expected to publish a more technical paper explaining how a digital dollar might work.

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

For example, the Fed would have to decide whether consumers would access their digital dollars through accounts directly with the central bank or through existing commercial lenders, said Richard Levin, chairman of fintech and regulatory practice at Nelson Mullins Riley & Scarborough LLP.

Some proponents say that CBDCs could help improve monetary policy effectiveness by allowing a central bank to change interest rates on accounts with CBDCs directly. This could allow central banks to bypass the often volatile financial markets and bring monetary policy straight to the retail level.

The Fed paper comes as central banks around the world grapple with the rise of numerous private electronic alternatives to traditional money and are considering their own versions. Private digital currency offerings have been extremely volatile, have in many cases been linked to criminal activity, and have not been commonly used 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, citing Bitcoin, Ether and Tether as examples. El Salvador, on the other hand, was the first country in the world to introduce Bitcoin as its national currency alongside the US dollar.

Write to Andrew Ackerman at andrew.ackerman@wsj.com

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