The Fed starts the debate on issuing its own digital currency with a new white paper

The Federal Reserve Building is seen in Washington, USA, October 20, 2021. REUTERS / Joshua Roberts / File Photo

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January 20 (Reuters) – Making an official digital version of the US dollar could give Americans more and faster payment options, but it would also pose a financial stability risk and privacy concerns, the US Federal Reserve said in a long-awaited discussion document. released Thursday.

The newspaper gave no political recommendations and gave no clear signals about where the Fed stands on whether to launch a digital central bank currency (CBDC), a digital form of cash in the pocket. The Fed said it would not proceed to create one “without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.”

The newspaper revolves around a topic that has sparked debate in the Fed’s top ranks, even while other central banks around the world are exploring the use of digital currencies.

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Nevertheless, it sets the stage for the central bank to gather public feedback on the potential costs and benefits of a CBDC, which could ultimately advance long-term legislation.

“While a CBDC can offer a secure, digital payment option for households and businesses as the payment system continues to evolve, and may result in faster cross-country payment options, there may also be disadvantages,” Fed officials wrote.

Challenges include maintaining financial stability and ensuring that the digital dollar will “complement existing means of payment,” the Fed said. The central bank must also address major policy issues such as ensuring that a CBDC does not violate American privacy and that the government maintains its “ability to fight illegal finance.”

Unlike cryptocurrencies, which are usually run by private actors, a CBDC will be issued and supported by the central bank. It will differ from electronic transactions that take place through large commercial banks in that it can give consumers a direct claim to the central bank, similar to physical cash.

Around 90 countries are exploring or launching their own CBDCs, according to the Atlantic Council. A widely used digital euro, yuan or dollar may still be years away, but projects can dramatically disrupt the global financial system.

Despite stepping away from political recommendations, the Fed shed some light on how a digital dollar can work.

Critically, it said that a digital dollar would “best suit” US needs if it was mediated through the current financial system. This means that individuals do not want CBDC accounts directly with the Fed, an approach supported by some Democrats who say that a digital currency can help those without a bank. Banks were concerned that such an approach would erode their deposit base.

Nevertheless, Fed officials said they did not rule out anything.

The central bank will collect comments on the case via an online form for 120 days.

Thursday’s paper is separate from research that the Boston Fed has been working on with the Massachusetts Institute of Technology to explore the technological aspects of a CBDC. This research, including coding that could be used for a potential U.S. CBDC, will be released as early as next month.


The newspaper partially reiterated the views of Fed leader Jerome Powell, who has said that such a project must have broad support and ideally have a mandate from Congress.

Fed Governor Lael Brainard, meanwhile, has said it is not “sustainable” for the United States to endure the pursuit of a digital dollar at a time when competing economies are moving forward.

Others, including Fed Gov. Christopher Waller, are more skeptical, pointing out that many dollar transactions are already digital.

Jonathan McCollum, head of federal government relations for Davidoff Hutcher & Citron, said that some in Washington are worried that the United States could weaken its position as the holder of the global reserve currency if it does not move forward.

“The United States has the ability to set the rules for how digital currencies work in the international financial system, but it is important that we start now,” he said.

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Reporting by Jonnelle Marte; Additional reporting by Pete Schroeder and Michelle Price; Edited by Andrea Ricci

Our standards: Thomson Reuters Trust Principles.

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