The Federal Reserve takes a look at digital currency

According to a recent document from the Federal Reserve, a digital currency guaranteed by the US government might lead to speedier money transactions and be more accessible than the present banking system (via CNBC).

The document is supposed to be “the beginning of a conversation,” and it does not argue for the creation of a “central bank digital currency” (or CBDC). Still, the development of a digital currency would represent a significant change in the government’s involvement in our money. Consumers may become less interested in commercial banks, and the Fed’s capacity to influence the financial system may suffer as a result. The Fed is currently accepting public feedback, including any gaps in the paper’s coverage.

Many other nations and IT corporations are active in the market that the US is exploring.

According to Reuters, the document, which is a step toward the creation of a digital dollar, comes at a time when approximately 90 other nations are developing their own digital currencies. The European Central Bank is looking at the possibility of creating a digital Euro, while China has been testing a digital yuan since 2014. Stablecoins, some of which are pegged to the US dollar, have been gaining popularity in the cryptocurrency industry.

The government also wants to maintain supporting “the dollar’s dominating international position,” as the report puts it. As Bloomberg points out, doing its study in public might help the government make it simpler for other firms to create systems that are compatible with the US’s.

Some of the advantages of federally backed cash and privately owned digital money might be combined with a central bank-issued digital currency, such as:

  • Transfers between persons and corporations are quick and simple (even across borders)
  • People without bank accounts, who may have difficulty establishing accounts at private financial institutions, will have more access.
  • More security and customer trust – banks may collapse or run into liquidity problems, but the US government is less likely to do so.
  • Depending on how it’s designed, a federal digital currency might drastically alter the government’s involvement in our financial life.

There are other drawbacks: the government would have to handle the market’s response to the US taking on a function that has previously been filled by private banks. It would also require consumers to entrust all of their financial information to the government directly, however the study suggests that this problem may be alleviated by enabling “intermediaries” to solve privacy concerns “by using current mechanisms.”

A digital currency does not have to be built on the blockchain. The Fed said in its report that it “will continue to study a broad variety of design choices,” but that no particular design or technology has been recommended yet.

According to the report, a digital currency created by the central bank would have to be “privacy-protected, intermediated, broadly transferable, and identity-verified.” The reserve is actively testing and studying centralised, blockchain, and distributed methods of money creation.

The paper is highly worth reading if you’re interested in the future of money. And if you have any knowledge or strong feelings about it, you’ll have plenty of opportunity to express them while completing the 22-point survey.