The Fed Eyes Potential for a Digital Dollar
Neither this post nor any other on cryptofal.com should be taken as financial advice. It is not.
The other day, the Federal Reserve released a 35-page report discussing the potential for developing a central bank digital currency (CBDC). The overall takeaway from this report was that the Fed saw an opportunity to evolve in tandem with changes in the financial community. The increasing exposure, interest, and use of cryptocurrencies have made the decision to move towards a CBDC a natural progression.
The report outlines the historical development of payment system technology and how the Fed has embraced these as a way to stay current through various times periods. They discuss recent improvements to instant interbank transfers and payments but recognize its limitations and how a CBDC has the potential to:
“…provide households and businesses a convenient, electronic form of central bank money, with the safety and liquidity that would entail; give entrepreneurs a platform on which to create new financial products and services; support faster and cheaper payments (including cross-border payments), and expand consumer access to the financial system.”
In an interesting focus shift, the Fed addresses how inefficient cross-border payment systems are, especially where remittances were concerned. The need to support the “dominant international role of the U.S. dollar” is one of the key points for why CBDC would become an ideal option.
The challenges to developing a CBDC were numerous but primarily focused on security, changes to the existing financial structure, and accessibility for underexposed communities. The Fed estimates that “over 5% of U.S. households remain unbanked'' and around 20% of those with accounts still use costly financial institutions like check-cashing or money order services. A shift to digital currency “could fundamentally change the structure of the U.S. financial system, altering the roles and responsibilities of the private sector and the central bank.” At the heels of a structural change comes security concerns and how “designing appropriate defenses for CBDC could be particularly difficult because a CBDC network could potentially have more entry points than existing payment services.”
What the report indicates overall, is the changing line of thinking within the central bank. However, it was made clear that the primary objective was not to influence policy but to advance public dialogue on CBDCs. The extent to which the Fed will engage in dialogue and with whom can only be speculated, but they will likely consult with members of Congress, private financial institutions, and hopefully cryptocurrency and blockchain firms.
No matter the timeline or intention, the emergence of CBDCs won’t produce competition with cryptocurrency as it currently exists. What we now know is that the government's stance on digital currency is constantly evolving, and the community can be a part of the conversation to help shape the agenda or be left out of it entirely and be at the mercy of policymakers who have little understanding of the space.