U.S. is researching digital dollar
Cryptocurrencies,  Politics,  Regulation,  Technology

Fed Governor says U.S. is researching a digital dollar

The Federal Reserve may be well behind China, but news that it is actively looking at a central bank digital currency is a big step forward

Federal Reserve Governor Lael Brainard said on Aug. 13 that a U.S. central bank digital currency won’t happen overnight, but it is actively researching the technology.

A significant policy process which the Fed has not committed to would be required to consider the issuance of a CBDC, along with extensive deliberations and engagement with other parts of the federal government and a broad set of other stakeholders, she cautioned. She added there are painstaking legal considerations to be resolved.

Brainard’s announcement came the day before China revealed that it is expanding its own CBDC trial of a digital yuan to Beijing, Hong Kong, Macau, and the prosperous Guangdong province, among other areas.

“It is important to understand how the existing provisions of the Federal Reserve Act with regard to currency issuance apply to a CBDC and whether a CBDC would have legal tender status, depending on the design,” she stressed in a speech to the Federal Reserve Bank of San Francisco’s Innovation Office.

In another time-consuming endeavor on CDBCs, Brainard said the Fed is actively conducting research and experimentation related to distributed ledger technologies—which underlie blockchain—and their potential use cases for digital currencies.

“Given the dollar’s important role, it is essential that the Federal Reserve remain on the frontier of research and policy development regarding central bank digital currencies,” Brainard said.

A long road

Earlier this year, Treasury Secretary Stephen Mnuchin said publicly he does not believe a U.S. CBDC will be actively considered for five years, while Fed Chairman Jerome Powell has called a U.S. CBDC pointless.

Former Commodity Futures Trading Commission Chair Chris Giancarlo has been aggressively pushing for a U.S. CBDC through his newly founded Digital Dollar Project.

“The digital 21st century is underserved by an analog reserve currency,” he said at the organization’s January launch announcement. “A digital dollar would help future-proof the greenback and allow individuals and global enterprises to make payments in dollars irrespective of space and time.”

While central banks around the world, including the EU (especially France), Japan, and intergovernmental groups like the Bank for International Settlements are exploring the potential of innovative technologies to offer a digital equivalent of cash, she pointed out there continues to be a strong demand for U.S. currency.

Exploring technology and risks

Brainard said she views a Fed-issued CBDC as a potential complement to cash and other payments options.

Some of the research is being done by a multidisciplinary team at the Fed’s Technology Lab, which has been building and testing a range of distributed ledger platforms to understand their potential opportunity and risk with application developers from the Federal Reserve Banks of Cleveland, Dallas, and New York.

“[The effort] supports a policy team at the Board that is studying the implications of digital currencies on the payments ecosystem, monetary policy, financial stability, banking and finance, and consumer protection,” Brainard explained.

In addition, the Federal Reserve Bank of Boston is collaborating with researchers at the Massachusetts Institute of Technology in a multiyear effort to build and test a hypothetical digital currency oriented to central bank uses, she noted.

She warned digital currencies, including central bank digital currencies (CBDCs), present opportunities but also risks associated with privacy, illicit activity, and financial stability.

Brainard said her caution about crypto also extends from the reality that the introduction of Bitcoin and the subsequent emergence of stablecoins with potentially global reach, such as Facebook’s Libra, have raised fundamental questions about legal and regulatory safeguards, financial stability, and the role of currency in society.

Updated 11:39 a.m. on Aug. 14 2020 to add China CBDC article link.

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Ted Knutson is a veteran Washington financial reporter. Knutson does not own any cryptocurrencies.