The Federal Reserve is continuing its research on the use of a Fed-issued digital currency, but key officials are saying not to expect any government-issued digital dollars any time soon.
What are we trying to do with this? ''
was not clearly answered, Fed Governor Randal Quarles said in a webinar on Tuesday. The Fed is working with researchers at the Massachusetts Institute of Technology to test and build a digital dollar in different hypothetical use cases.
However, whether or not the Fed adopts one is a separate question.
Although other central banks have communicated strong interest in launching digital versions of their currencies, Fed officials are cautioning that there are many risks associated with launching one. One issue is privacy.
If the Fed uses a blockchain to manage the distribution of digital dollars, users may have concerns that the central bank can access and track individual spending data. Another issue is disrupting the banking system; if the Fed allowed users to pay for goods and services using a Federal-issued digital wallet, banks would be competing with the Fed itself for deposit financing. Jerome Powell has said that he is open to a two-tier system in which the private sector manages the wallet, not the Fed.
There's also concern about whether the Fed has any authority or not to issue a digital currency at all. Powell promised that he would not launch one without explicit legislation from Congress authorizing the Fed to do so.
On March 22, Powell said that you can expect us to move with great care and transparency in considering a CBDC.
Other central banks are moving faster on their digital currency, with the European Central Bank already pushing out the possibility of launching one within four years.
The Fed project is already several years behind the People's Bank of China, which is presently piloting its own digital yuan with users and merchants.
Some central banks see monetary policy benefits to launching digital currencies.
For example, the use of a digital wallet by central banks would allow more direct pass on stimulus to consumers. Instead of dropping money on the banking system by helicopter, the Fed could funnel the stimulus straight into consumer wallets.
The ECB and other central banks with negative interest rates could also apply such rates directly to any deposits held in the wallets, enabling consumers to spend more in the economy.
Bank of America Securities expects that central banks will find more benefits in digital currency than risks.
We believe CBDCs will become more widespread by the mid 2020 s, BofA Securities wrote Wednesday.
But U.S. policymakers are reluctant to disrupt the status quo because of the dollar's role as world reserve currency. Even in the race between other central banks and digital players like Facebook's Diem, the Fed has said it will not move with haste on the dollar project.
I do n't see an urgent flaw in our system that a digital currency from the Central Bank would solve, Quarles said Tuesday.
Brian Cheung is a reporter covering the Fed, economics and banking for Yahoo Finance. You can follow him on Twitter bcheungz.
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