Governments were put on alert by the rise of Cryptocurrencies. China and Sweden are experimenting with their own currencies. The Federal Reserve is dipping its toes in the water.
A new report lays out the potential benefits and risks of fully digitizing the US dollar, despite the Federal Reserve not siding with or against a central bank digital currency.
The Fed published a report on the topic of digital currency on Thursday. The public would be able to use a pure digital version of cash that was backed by the Fed. It wouldn't require the same deposit insurance that banks need for cash, and it wouldn't need to be backed by a physical asset.
A Fed-backed digital dollar would give many of the benefits of cryptocurrencies without the wild price swings and usage fees. The best aspects of both physical and digital currency would be melded for the average American.
A regular dollar wouldn't feel different from aCBDC. Digital cash is backed by private-sector banks and is used when shopping with credit or debit cards. Americans would be able to shop with a digital dollar backed by the country's central bank. Physical dollar bills are backed by the Fed, not by commercial banks.
The Fed stopped short of taking a position on the topic, but said it would engage with the public, Congress, and other stakeholders. There are a number of reasons why a currency like this would benefit the country and serve as a better medium for spending than cryptocurrencies have.
Safe, fast, and accessible payments could be brought about by aCBDC.
Real-time peer-to-peer payments made Cryptocurrencies popular. The same could be offered by aCBDC. Transactions with aCBDC could be used for everything from buying groceries to receiving governmentStimulus, according to the report.
The digital cash would be free from credit risk, as well as being free from the volatility that makes spending with it unreliable. A recent report from the President's Working Group on Financial Markets found gaps in the authority of regulators to address some stablecoin risks.
The Fed said that aCBDC would allow for more flexibility. Payments could be scheduled for certain times and used for small transfers that traditional systems might not allow for. Users would be able to make transfers without a private third party with the help of a CBDC.
It would take time to improve cross-border payments. New infrastructure, government coordination, and enforcement are needed to curb illegal finance. Transfer fees and long settlement times could be eliminated by a future network of CBDC.
21st-century risks would come with aCBDC.
The Fed warned of the pitfalls of a fully digitized dollar. Allowing the Fed to back digital payments could fundamentally change the structure of the US financial system. Commercial banks rely on deposits to dole out loans, but aCBDC could replace cash held in commercial banks with digital wallet offered by the private sector. It could be difficult for people to take out loans.
In times of economic uncertainty, the Fed said that the stability of aCBDC could spark runs on commercial banks. If people rushed to convert their bank holdings intoCBDC, traditional measures would be inefficient.
The central bank's policy power could be eroded by the implementation of a Fed-backed digital dollar. Changing the amount of reserves in the financial system could affect how the Fed sets interest rates. The Fed would need to increase its reserves to deal with fluctuations between outstanding cash, bank reserves, andCBDC holdings.
The Fed said that the introduction of a CBDC would make for a highly significant innovation in American money. The central bank is expected to further discuss the currency's pros and cons after taking comments on the matter until May 20. The Fed's report opens the door to such a project, even though the future of a dollar remains uncertain.
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