The US Federal Reserve (Fed) last Thursday published a paper entitled “Money and Payments: The US Dollar in the Age of Digital Transformation”. The paper opens an initial public debate on whether or not it is really possible to launch a serious digital dollar project.
The Fed raises questions about the digital dollar
The document seems to want to address in a more decisive way a topic that for months has been creating wide discussions within the board of the American central bank. The paper would be aimed at gathering opinions on the main costs and benefits of the possible future adoption of a digital state currency in the US.
With this document, which has been awaited since last October, the central bank, led by Jerome Powell, who has always seemed rather timid about the project of a CBDC, takes its first real official step towards something that in China could soon become a reality, coinciding with the next Winter Olympics in Beijing.
The Fed calls Congress
An early indication that is reiterated in the document is that the central bank does not want to take any official steps without having the endorsement of Congress:
“The Federal Reserve does not intend to proceed with issuance of a C.B.D.C. without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law”.
This is because as Fed analysts point out, the adoption of a digital currency would surely have disruptive effects on the traditional financial and economic system.
“A CBDC could fundamentally change the structure of the U.S. financial system, altering the roles and responsibilities of the private sector and the central bank,” said the Fed paper. “Some have suggested that, if these new CBDCs were more attractive than existing forms of the U.S. dollar, global use of the dollar could decrease — and a U.S. CBDC might help preserve the international role of the dollar”.
The risks to the financial system posed by a digital dollar
To be much clearer, the Fed states in the report that a CBDC could effectively replace commercial bank money, likely causing higher prices for retail customers and possibly decreasing investor interest in “mutual funds, Treasury bills, and other futures instruments.”
Among the Fed’s risks and concerns derived from the adoption of a new digital government dollar, the report points out how the Fed likely may need to increase its reserves based on demand for a digital currency.
But at the same time, as Jonathan McCollum, president of federal government relations for Davidoff Hutcher & Citron, noted, if they don’t move forward on the project, the US could weaken its position as holder of the global reserve currency:
“The U.S. has the opportunity to set the rules for how digital currencies function in the international financial system, but it is critical we start now”.
120 days to decide
The document will be subjected to comments and suggestions for 120 days in order to reach an initial shared conclusion on whether or not to move forward on such a project:
“The Federal Reserve will only take further steps toward developing a CBDC if research points to benefits for households, businesses, and the economy overall that exceed the downside risks, and indicates that CBDC is superior to alternative methods. Furthermore, the Federal Reserve would only pursue a CBDC in the context of broad public and cross-governmental support”.
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