The Fed is taking a look at digital currency; keeps Us Guessing on the Future of Digital Money

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Digital dollar, transfer of money, digital currencies

According to a new Federal Reserve paper, a digital dollar backed by the US government could result in faster money transfers and be more accessible than the current banking system (via CNBC). The creation of a digital dollar would represent a significant shift in the government’s role in our finances. 

Potential drawbacks include commercial banks becoming less appealing to consumers and the Fed’s ability to influence the financial system.

According to Reuters, this step toward the existence of a digital dollar comes at a time when approximately 90 other countries are considering their digital currencies. 

The European Central Bank is looking into the creation of a digital Euro, and China has been testing a digital yuan since 2014. Meanwhile, in the cryptocurrency world and digital currencies, stable coins, some of which are pegged to the US dollar, are gaining popularity. 

A central bank-issued digital currency could combine some of the advantages of federally backed cash and privately controlled digital money, such as:

  • Transfer of money between people and businesses are quick and simple (even across borders)
  • More accessibility for people who do not have bank accounts and may struggle to open accounts at private financial institutions.
  • More security and consumer confidence — banks can fail or run into liquidity problems, which the US government is less likely to encounter.

The Fed continues to keep us guessing about the future of digital currencies:

The US Federal Reserve provides a very neutral overview in its long-awaited Central Bank Digital Currency discussion paper and does not shed much light on its appetite for a “digital dollar.”

Fed Chair Jerome Powell had originally announced a central bank digital currency (CBDC) discussion paper for summer 2021, but the Fed Board took a little longer to agree on the text. 

Instead of advocating for or against CBDC, the Fed provides a balanced overview of money, digital assets, and the potential benefits and drawbacks of a CBDC in this paper. 

The Fed does provide a clear list of requirements for a “digital dollar”:

Its advantages should outweigh the costs and risks:

  1. Benefits should be realized more efficiently than through alternative methods, such as private stable coins.
  2. The digital currency should supplement, rather than replace, existing money forms and payment methods.
  3. It should safeguard privacy while also deterring criminal activity.
  4. It should have widespread support from “key stakeholders.”

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