For the first time, the Federal Reserve is launching a period of debate and public comment on the introduction of a digital currency by the central bank, as it seeks to keep pace with global financial innovation and maintain the dominance of the dollar.
After months of anticipation, the Fed released a long discussion paper on Thursday that will serve as the basis for what is expected to heat up and a subsequent debate in the heart of the central bank in the coming months – although it has made it clear. “Prefer any political outcome” at this time.
“We look forward to engaging with the public, elected representatives and a wide range of stakeholders as we explore the pros and cons of the central bank’s digital currency. [CBDC] in the United States, “said Jay Powell, chairman of the Fed.
In recent years, the Fed has been reluctant to accept the central bank’s digital currency, saying it will only do so if the benefits outweigh the costs. He is lagging behind authorities in China, which is piloting the digital yuan. The European Central Bank has also made a breakthrough with technology.
Powell said earlier that any CBDC should serve “as a complement, not as a replacement for cash and current digital forms of the private sector dollar, such as deposits in commercial banks.”
The Fed is finally entering a topic that is inevitable for central banks as they consider how to ensure monetary and financial stability amid a variety of financial technology innovations, including an accelerating shift to digital forms of payment that reshape financial markets and institutions, ”said Essouar Prasad, a professor at Cornell University with experience in digital currencies.
The Fed is seeking public comment on a potential CBDC over the next 120 days, and no decision has yet been made on how it will be structured or whether it will be implemented.
“While the CBDC can provide a secure, digital payment option for households and businesses as the payment system continues to evolve and could lead to faster payment options between countries, there may be downsides,” the Fed said.
“These include how to ensure that the CBDC maintains 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 preserve the ability to combat illicit finances,” he added.
The Fed said it would not continue without “clear support from the executive and Congress, ideally in the form of a specific empowering law.”
“The Federal Reserve report is a good first step toward designing a central bank digital currency that will bring more Americans into our banking system and help preserve the United States’ leadership in the global economy,” said Sherod Brown, chairman of the banking committee. of the Senate. .
Pat Toomie, a Republican senator from Pennsylvania, applauded the central bank for its “constructive” contribution to the current debate and expressed support for the Fed to consider such technologies. But he also expressed concerns about privacy issues, suggesting a possible obstacle to the introduction of the CBDC.
Ian Hatzius, chief economist at Goldman Sachs, told the Financial Times during a panel earlier Thursday in the Chicago Global Affairs Council that the Fed is unlikely to be “very aggressive” in its plans to continue if decided to do it.
“There is room for caution, but I do not think you will soon replace the basic bank-oriented financial intermediation system,” he said.
The Fed seems to have weighed in on the risks and acknowledged that the CBDC could “fundamentally change the structure of the US financial system.” He noted the potential to increase the cost of bank financing if bank deposits fall as the interest-bearing digital dollar becomes more widely available. This in turn can increase the cost of credit for households and businesses.
However, he noted certain design parameters that could help avoid this result, including limiting the amount of CBDC one can own.
The Fed also said it would “best serve the needs” of the United States by offering private sector accounts or digital portfolios to “facilitate” the management of all related holdings and payments. They suggested that commercial banks and regulated non-banking financial services institutions could run this fee.
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“Individuals, businesses and governments could potentially use the CBDC to make basic purchases of goods and services or to pay bills, and governments could use the CBDC to collect taxes or pay benefits directly to citizens,” the Fed said.
Inaction also has consequences, the Fed said. The failure to develop a digital US currency could undermine the country’s dominance in global markets, the discussion paper warns.
“It’s important … to look at the consequences of a potential future situation in which many foreign countries and monetary unions may have introduced the CBDC,” the Fed said. the US dollar, global use of the dollar could decline – and the CBDC in the United States can help maintain the international role of the dollar, “he added.