Fed study on digital currency leans towards role of banks | Business

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The US Federal Reserve released a much-anticipated report on central bank digital currencies that suggested it was leaning towards banks and other financial firms, rather than the Fed itself, managing customers’ digital accounts.

A central bank digital currency would differ in some ways from the online and digital payments that millions of Americans already make. These transactions are routed through banks, which would not be necessary with a digital dollar.

The Fed document emphasized that no final decision regarding a digital currency has been made. But he suggested that a digital currency that would “best meet the needs” of the nation would follow a “middle-range model” whereby banks or payment companies create digital accounts or wallets.

The Fed has called the potential introduction of a digital currency a milestone that could have far-reaching consequences for banks and other financial firms, as well as the central bank itself.

“The introduction of a (central bank digital currency) would represent a very significant innovation in U.S. currency,” the study said. The Fed said it “could fundamentally alter the structure of the US financial system, changing the roles and responsibilities of the private sector and the central bank.”

The report comes at a time when digital money is proliferating in various forms. Millions of people own cryptocurrencies, although they are often used more as investments than means of payment. But so-called stablecoins, which are often pegged to the dollar, have also boomed over the past year, mostly for cryptocurrency transactions.

And most central banks around the world are looking at government-backed digital currencies. China’s central bank has already tested a digital version of the yuan. The European Central Bank began exploring a digital euro in October and said its “investigation period” would last two years. Some Caribbean countries have already issued digital currencies.

China’s action and the explosion of stablecoins, which can be used instead of dollars in international transactions, have mounted pressure on the Fed to consider a digital currency. Last March, Fed Chairman Jerome Powell said that if the Fed were to keep pace with financial innovations, it would proceed with caution.

“As the world’s primary reserve currency…we have an obligation to be at the forefront of understanding technological challenges,” Powell said at the time. “But…we don’t need to rush this project. We don’t need to be first to market.

The Fed is likely years away from issuing a digital currency, if it decides to do so. The document released Thursday begins a 120-day comment period, during which the Fed will seek public comment. The Fed also said it would only proceed with the support of Congress, “ideally in the form of specific enabling legislation.”

And not all central bank officials agree on the need for a central bank digital currency. Lael Brainard, who sits on the Fed’s board of governors and was named vice chair by President Joe Biden, for example, expressed support for the concept, while fellow board member Christopher Waller spoke out. shown skeptical.

A digital dollar could bring a host of benefits as well as risks. It would be a safer form of digital payment because the Fed, unlike a bank or stablecoin companies, cannot go bankrupt. It might be easier and cheaper to access for people without a bank account.

At the same time, a digital currency could pose privacy risks because it would be issued by the government. The Fed document, however, suggests that banks and other third-party companies would protect Fed consumer data, while enforcing existing rules against money laundering and other illicit activities.

Such a government-issued digital dollar could also have major implications for commercial banks, as many Americans might prefer to hold this currency in a “wallet” issued by a payment provider like PayPal or Venmo, which could reduce deposits. banking.

The Fed could even seek to influence the economy through a digital currency, as it currently does by controlling interest rates. It could pay interest on a digital dollar, for example, or even cause it to lose value, in the form of a negative interest rate. An interest payment could make a digital dollar more attractive than cash in a bank.

“This substitution effect could reduce the total amount of deposits in the banking system,” the Fed report said.

This has not gone unnoticed by the banks. The Bank Policy Institute, a lobby group, claimed in a blog post last June that the Fed has no legal authority to pay interest on a digital dollar.

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