Finance News

The Fed is releasing a long-awaited examine on a digital greenback, however has but to touch upon its creation

The Federal Reserve released its long-awaited digital dollar study on Thursday, examining the ins and outs of the much-discussed topic and soliciting public comment.

The 40-page paper, described as "the first step in a public discussion between the Federal Reserve and stakeholders about central bank digital currencies," shies away from any conclusions about a central bank digital currency, or CBDC. The report was originally expected in the summer of 2021 but had been delayed.

Instead, it offers a comprehensive overview of benefits such as speeding up the electronic payment system at a time when financial transactions around the world are already highly digitized. Some of the downsides the report discusses are risks to financial stability and privacy protections while protecting against fraud and other illegal issues.

Jerome Powell, Chairman of the Federal Reserve Board, speaks at a reappointment hearing for the Senate Committee on Banking, Housing and Urban Affairs January 11, 2022 in Washington, DC.


"A CBDC could fundamentally change the structure of the US financial system and alter the roles and responsibilities of the private sector and the central bank," the report said.

Fed Chair Jerome Powell has been largely noncommittal in his public comments on the CBDC. The concept's biggest proponent is Fed Governor Lael Brainard, who has been appointed vice chair of the Federal Open Market Committee on monetary policy.

Several other Fed officials have expressed skepticism about the digital dollar, saying the benefits are not obvious.

A key difference between the Fed dollar and other digital transactions is that current digital money is a liability of commercial banks, while the CBDC would be a liability of the Fed. Among other things, this would mean that the Fed would not pay interest on the money stored with it, although some depositors might prefer to keep their money with the central bank because it is risk-free.

The paper lists a checklist of 22 different items for which it is asking for public feedback. There will be a 120 day comment period. Fed officials say the report is the first step in a lengthy process, but there's no timeline for when it will be completed.

"We look forward to engaging with the public, elected officials and a wide range of stakeholders as we explore the pros and cons of a central bank digital currency in the United States," Powell said in a statement.

The paper, released Thursday, notes that the Fed's "initial analysis suggests that a potential US CBDC, if created, would best meet the needs of the United States by being privacy-protective, mediating, widely transferrable." and is identity verified".

Report 'does not comment'

However, the report also notes that it "does not intend to advance any particular policy outcome and takes no position on the ultimate desirability" of the digital dollar.

Some of the most noted benefits are the speed of a Fed-controlled system in the event of, say, a need like the onset of the Covid pandemic to get stimulus payments to people quickly. The provision of financial services to the unbanked was also cited as a benefit.

However, the Fed is already in the midst of developing what it calls a "24/7 payment and settlement service" called Fed Now, which is expected to come online in 2023.

However, digital dollar advocates fear that the Fed's delay in launching a central bank currency will push it behind global competitors, particularly in China, which has already made headway with its own product. There were indications that China's leadership in this area could ultimately threaten the US dollar's hegemony as the world's reserve currency.

However, Powell and other Fed officials say they are not concerned about the speed of the project and stress the need to get it right.

"The introduction of a CBDC would represent a most significant change in American money," the report states. “Accordingly, broad consultation with the general public and key stakeholders is essential. This paper is the first step in such a conversation.”

The Fed also said it would not act without a clear mandate from Congress, preferably in the form of "specific enabling legislation."

Related Articles