Is the Federal Reserve Planning to Create a Digital Currency?


Technology has changed everyone’s life and none more so than American consumers. Digital photograph­y, online shopping, inapp purchases, paperless transactio­ns and contactles­s payments are commonplac­e. McKinsey & Company’s ‘Survey of US Consumers’ reported that 78% of Americans utilized a digital payment method in 2020, undoubtedl­y exacerbate­d by Covid-19.

Today’s technology allows consumers to make payments or send money through Venmo, or PayPal, or any of the other digital payment systems. But this system still involves credit card companies, banks or other financial institutio­ns. Those players “settle” the transactio­ns as they are authorized and approved.

On January 20, 2022, the United States Federal Reserve System’s Board of Governors released a paper that discussed how the United States domestic payment system could be improved. Among other things, it o•ered the pros and cons of creating a Central Bank Digital Currency (CBDC). ˜e Fed then asked for commentary on its paper by May. The paper acknowledg­ed the widespread popularity of digital assets and questioned how a CBDC might št into today’s economy.

A Federal Digital Dollar would take money out of your digital wallet and place that money in your friend’s or a company’s digital wallet in one fast process. It would all then be recorded in the Federal Reserve’s digital ledger.

Today, the only currency available to citizens is paper currency (Federal Reserve Notes in denominati­ons from $1.00 to $100.00). A digital currency option would enable the public to make their own digital payments and it would be, according to this Federal Reserve report, the “safest digital asset available to the general public, with no associated credit or liquidity risk.”

In March 2022, President Biden signed an executive order mandating federal agencies to evaluate the risks and rewards of how these digital assets might a•ect the U.S. economy and our entire global šnancial system.

Current non-government­al digital assets, such as Bitcoin and Ether require the backing of an underlying asset pool to maintain value. But that is not how a Federal CBDC would work.

The benefits of a Federal CBDC are:

• Offering the general public digital assets that are free from credit and liquidity risk;

• Improvemen­ts to the speed and settlement of all types of internatio­nal payments;

• As more countries are considerin­g or are moving away from paper dollars and embracing digital currencies, a federal CBDC could support the U.S. dollar’s internatio­nal status and retain it as the world’s internatio­nal reserve currency;

• Aiding economical­ly vulnerable communitie­s in the U.S. by making wages, tax refunds and other federal payments quicker, faster and more secure.

The risks in offering CBDCs are: • Reductions in the amounts of depos

its in low-risk assets such as moneymarke­t funds and Treasury Bills;

• Conversion of commercial bank deposits might cause a significan­t and rapid depletion of commercial bank deposits, threatenin­g insolvency;

• The current banking system relies on federal regulation­s and mandates on banks knowing their financial customers. Any CBDC system would have to incorporat­e all of those same requiremen­ts to maintain safety;

• Cyber security risks would be heightened and additional safeguards would be required;

• The Federal Reserve’s mechanisms to battle inflation through money policy changes might be severely impacted.

Federal Reserve Chairman Jerome Powell recently stated “You wouldn’t need cryptocurr­encies if you had a digital U. S. currency. I think that’s one of the strongest arguments in its favor.”

In 2021, the Atlantic Council, a nonpartisa­n organizati­on that promotes U.S. leadership in global a‹airs, released its Central Bank Digital Currency tracker, and reported that nearly 90 countries were exploring issuing their own digital currency or are in the process of making that possibilit­y a reality.

So, is this a “done deal” and a U.S. digital currency is just around the corner?

Not quite! While the federal government is studying the implicatio­ns of ‘going digital’ there are numerous, important issues that need to be resolved before this becomes a reality. Cybersecur­ity, privacy, encryption, and its impact on —nancial systems throughout the world, are just a handful of concerns. None of these changes will happen overnight.

Federal Reserve Vice Chair Lael Brainard stated that creating a digital U.S. Dollar, “would likely take as long as —ve years. We recognize the risks of not acting, just as there are risks of acting.”

One type of cryptocurr­ency whose value is tied to an outside asset, such as the U.S. dollar or gold, to stabilize the price is called a ‘stablecoin.’ Other cryptocurr­encies, like Bitcoin, do not require trust of an intermedia­ry —nancial institutio­n to send or receive payments. ›at allows global use by almost anyone. But since they are not backed by outside assets the prices can, and do, œuctuate – wildly at times. ›is unpredicta­ble nature makes them unreliable for the average person to use.

Would a federal CBDC be able to co-exist with today’s popular stablecoin­s? Will there be widespread public acceptance of such as investment vehicle? Will the American public want and use it?

My advice would be to “buckle your seatbelt and hang on to your (digital) wallet!”

 ?? The Federal Reserve Board of Governors PUBLIC DOMAIN ??
The Federal Reserve Board of Governors PUBLIC DOMAIN
 ?? ?? Mike Garofalo, a coin dealer for more than 40 years, follows the growth of cryptocurr­encies. He began his career in 1979 and retired in 2019 a er serving as Vice President and Director of Numismatic­s for APMEX. He has written hundreds of articles on bullion and rare coins.
Mike Garofalo, a coin dealer for more than 40 years, follows the growth of cryptocurr­encies. He began his career in 1979 and retired in 2019 a er serving as Vice President and Director of Numismatic­s for APMEX. He has written hundreds of articles on bullion and rare coins.

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