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A decisive step towards the digital dollar? The US Federal Reserve has opened the debate on a possible ‘official’ digital currency with an expected document with the pros and cons of it released this Thursday. The world’s largest central bank invites public comment and input on whether and how a central bank digital currency (CBDC) can safely and efficiently enhance the nation’s payment system. It’s not just about keeping pace with global financial innovation: dollar supremacy is at stake.

“We look forward to engaging with the public, elected representatives, and a wide range of stakeholders as we examine the positives and negatives of a central bank digital currency in the United States,” said Fed Chairman Jerome Powell. Citizens can send their contributions by answering about 20 questions. The Fed has given a period of 120 days.

The document, which does not lean towards any particular result, is limited to describing the current state of the US payment system and analyzing the different types of payment methods and digital assets that have emerged in recent years, including stablecoins and other cryptocurrencies. His most relevant point is when he lists possible benefits and risks of a CBDC.

Those responsible for the Fed admit in the text that consumers and companies have been having and transferring money digitally for a long time, through bank accounts, online transactions or payment applications. The forms of money used in these transactions are obligations of private entities, such as commercial banks. On the contrary, they point a CBDC would be a liability of a central bank, as in this case the Fed.

However, the authors of the document point out, although a CBDC could 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 also be drawbacks. Among them is the difficulty in ensuring that a digital currency preserves monetary and financial stability, in addition to complementing the existing means of payment. Other key considerations are how to preserve the privacy of citizens and how to maintain the ability to combat illicit finance.

It also stresses that the use of a CBDC could “fundamentally change the structure of the US financial system”, as there is a possibility that banks’ funding costs will increase if deposits decrease as the availability of a CBDC becomes more widespread. digital dollar with interest. This, in turn, could increase the cost of credit for households and businesses.

The body stresses that “the best thing for the needs” of the US would be for the private sector offered digital accounts or wallets to “easily manage” all holdings and related payments. At this point he suggests that commercial banks and regulated non-bank financial services institutions take the lead in this task.

However, from the Fed they consider that if “individuals, companies and governments can use a CBDC to make basic purchases of goods and services or pay bills, governments could also use it to collect taxes or make benefit payments directly to citizens.

Beyond all these considerations, they warn from the US central bank, inaction also has consequences. Failure to develop a US digital currency could erode the country’s supremacy in world markets, the discussion paper warns.

In recent years, the Fed has been reluctant to adopt an official digital currency, saying it would only do so if the benefits outweigh the costs. These reluctance have caused the agency to lag behind the authorities in China, which is testing a digital renminbi. The European Central Bank (ECB) has also made inroads on the scope of a digital euro.

“The Federal Reserve report is a good first step toward designing a central bank digital currency that brings more Americans into our banking system and helps maintain US leadership in the global economy,” said Sherrod Brown. Democratic senator from Ohio and chairman of the Senate banking committee, according to Financial Times. Also from the political spectrum, Pat Toomey, a Republican senator from Pennsylvania, has applauded the Fed’s “constructive” initiative, being in favor of a CBDC. However, he has expressed his questions about privacy issues, something that could be a hindrance in the launch of a digital currency.

Some skepticism seems to be taking root among financial analysts. Jan Hatzius, chief economist at Goldman Sachs, has predicted that the Fed is unlikely to be “very aggressive” in its plans if he finally decides with the digital dollar. “There is room to introduce it cautiously, but I think it is not going to replace the central financial intermediation system focused on banks any time soon.”


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