Digital Currency Report from the Fed is Past Due

9/30/2021

Economy

0 min read

About the Central Bank Digital Currency Position Report, That’s Late

The U.S. Federal Reserve Board is expected to release a nail-biter of a report stating their position on potentially adopting a digital dollar. The cryptocurrency would have the same backing and perqs of $US Dollars. The Fed expressed last summer that it had partnered with the Massachusetts Institute of Technology to “understand the opportunities and limitations” of a Central Bank Digital Currency (CBDC). It was announced the project was to release its findings in late summer 2021. It is now early Fall 2021, the markets have not yet gotten the expected big announcement. However, Fed Chair Powell may have shown his hand on Tuesday.

Speaking before the Senate Banking Committee Tuesday (Sept. 28), Powell said that while existing laws governing the Fed’s activities could serve as a basis for issuing a digitized version of the U.S. dollar, he expressed a preference for working on a legislation-backed push instead. This was in response to a question from Senator Pat Toomey of Pennsylvania. He further set expectations for the past-due board’s report, saying the Fed had made no decision on a CBDC. The paper will instead tackle some of the related public policy issues and set the stage for the central bank to gather feedback from lawmakers and the public.

Although the paper, when released, will not be definitive, it seems it will set the Fed’s stance regarding pros, cons, and how-tos. As with most Fed position papers, it may “define” in unclear language that will be studied carefully by those active in markets that could be impacted. The current direction, based on Chairman Powell’s answer is that the Fed expects a seat at the table but would like Congress to hand down any definitive action.

Foreign Central Banks

We live in a world that has become very small, so what happens in one major market impacts another. Although Europe’s potential adoption of a digital euro, or China, which is looking to creates a digital yuan would impact the U.S., an actual dollar valued like cash may be years away. Some believe the potential for dramatically disrupting the global financial balance is too great, while others worry the United States will cede dominance of the global financial system if it does not digitize the dollar, which is used as the global reserve currency. Of special concern, is China’s digital
yuan pilot project, which is believed to be far ahead of the United States and its biggest economic rival.

Other Decision Maker Positions

Fed Governor Lael Brainard is on record saying she finds it inconceivable that the United States would not pursue a digital dollar when competing economies were forging ahead with CBDCs. “That just doesn’t sound like a sustainable future,” she said in July.

Fed Governors Christopher Waller and Randal Quarles have argued many dollar transactions are now digital and that the costs of a CBDC could far outweigh any benefit. Staff within the Fed are also said to be divided on the issue.

On Capitol Hill, some see a CBDC as the door opener that makes financial services accessible and affordable for millions of Americans that are currently ignored by the mainstream banking system. At the same time, others express concerns over privacy and security.

For those focused on what it would mean for wholesale and merchant banking, CBDCs could come into existence strictly for wholesale use. This could speed up processes and lower the cost of cross-border payments between parties. Individually, a retail digital dollar could be used by the general public, expanding Americans’ access to a range of financial services.

Take-Away

If the Fed’s original intent of sending out a position paper on a CBDC in late Summer was to set the course toward or away from its adoption, they seem to have backed off. Some things take longer than expected, and with big decisions, discoveries are often found that would impact any final release. The paper when released, will be combed through for nuances decision untold. If we are to believe Chairman Powell’s answer last Tuesday, the Fed Chair who is up for reappointment, would prefer to have input in the decision but not be the decider.

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