Grygo is the chief content officer for FTF & FTF News.
The Federal Reserve is mulling what a digital currency backed by a central bank would look like.
This should come as no surprise given the onset of blockchains and distributed ledger technology, and then cryptocurrencies and digital assets in many forms. They all have had an underlying driver – a disintermediation push to bring on decentralized transaction systems, currencies, and payment systems that, in theory, would help democratize financial infrastructures.
It’s not clear that Wall Street and other global financial markets are embracing the high-minded crypto reforms and ideals or even if they have any clue about how cryptography works. Drug dealers, hackers, and other hard-core criminals have also skipped the debate about macro matters and presumably are more focused on the details of their pursuits.
Thus, in a short span of time, many people have wittingly or unwittingly embraced blockchain-based systems, distributed ledgers, and digital assets within current infrastructures or completely off the grid.
At the same time, the crypto craze has also forced the issue of digital currencies via central banks – now known as central bank digital currencies (CBDCs).
Recently, officials of the Federal Reserve System brought up the issue via a white paper, “Money and Payments: The U.S. Dollar in the Age of Digital Transformation.”
The paper tackles “the pros and cons of a potential U.S. central bank digital currency … and is the first step in a discussion of whether and how a CBDC could improve the safe and efficient domestic payments system,” according to an introduction on the Fed’s website. “Importantly, the paper does not favor any policy outcome.” Of course, it wouldn’t.
The paper does cover current domestic payments systems, digital payment methods, digital assets, stablecoins, and other cryptocurrencies.
“The Federal Reserve, as the nation’s central bank, works to maintain the public’s confidence by fostering monetary stability, financial stability, and a safe and efficient payment system. … For the purpose of this paper, a CBDC is defined as a digital liability of a central bank that is widely available to the general public. In this respect, it is analogous to a digital form of paper money,” according to the report.
“While a CBDC could provide a safe, digital payment option for households and businesses as the payments system continues to evolve, and may result in faster payment options between countries, there may also be downsides,” according to the report.
“They include how to ensure a CBDC would preserve monetary and financial stability as well as complement existing means of payment. Other key policy considerations include how to preserve the privacy of citizens and maintain the ability to combat illicit finance,” the Fed notes.
The paper reviews the pioneering electronic national check-clearing system that “used dedicated telegraph wires to transfer funds between banks. In the 1970s, the Federal Reserve developed an automated clearinghouse (ACH) system that offered an electronic alternative to paper checks. And in 2019, the Federal Reserve committed to building the FedNow Service, which will provide real-time, around-the-clock interbank payments, every day of the year.”
Fed officials acknowledge the emergence of “digital wallets, mobile payment apps, and new digital assets such as cryptocurrencies and stablecoins. These technological advances have also led central banks around the globe to explore the potential benefits and risks of issuing a CBDC,” according to the paper.
The Fed has a list of specifications for what a CBDC should do, including “complement, rather than replace, current forms of money and methods for providing financial services,” “protect against criminal activity,” and “have broad support from key stakeholders.”
For what the Fed itself will do, it will be “soliciting and reviewing a wide range of views as it continues to study whether a U.S. CBDC would be appropriate,” and it will play an active role in “developing international standards for CBDCs.”
The Fed’s initial analysis “suggests that a potential U.S. CBDC, if one were created, would best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified,” according to the report.
So, the Fed has issued the report, wants you to read it, and then wants you to answer 20 questions.
“The Federal Reserve will seek input from a wide range of stakeholders that might use a CBDC or be affected by its introduction. This paper concludes with a request for public comment, the first step in a broad consultation that will also include targeted outreach and public forums,” according to the Fed.
To help you get started, here’s a link to the report: https://bit.ly/35Jfrs3
Need a Reprint?