The Federal Reserve is considering what a central bank-backed digital currency would look like.
This should come as no surprise given the rise of blockchains and distributed ledger technology, and then cryptocurrencies and digital assets in many forms. They all had an underlying driver – a push for disintermediation to build decentralized transaction systems, currencies, and payment systems that, in theory, would help democratize financial infrastructure.
It is unclear whether Wall Street and other global financial markets are embracing the ambitious crypto reforms and ideals or even if they have any idea how crypto works. Drug traffickers, hackers and other hard-core criminals have also ignored the debate on macro issues and are likely focusing more on the details of their business.
So, in a short time, many people have, knowingly or unknowingly, adopted blockchain-based systems, distributed ledgers, and digital assets within current infrastructures or completely off-grid.
At the same time, the crypto craze has also forced the issuance of digital currencies through central banks – now known as Central Bank Digital Currencies (CBDCs).
Recently, Federal Reserve system officials raised the issue via a white paper, “Money and Payments: The US Dollar in the Age of Digital Transformation.”
The paper discusses “the pros and cons of a potential U.S. central bank digital currency…and is the first step in a discussion of whether and how a CBDC could improve the safe and efficient national payments system. according to an introduction on the Fed’s website. . “It is important to note that the document does not promote any political outcome.” Of course, that wouldn’t be the case.
The document covers current national payment systems, digital payment methods, digital assets, stablecoins, and other cryptocurrencies.
“The Federal Reserve, as the nation’s central bank, works to maintain public confidence by promoting monetary stability, financial stability, and a safe and efficient payments system. … For the purposes of this document, a CBDC is defined as a digital liability of a central bank that is widely available to the general public. In this regard, it is analogous to a digital form of paper money,” according to the report.
“While a CBDC can provide a safe digital payment option for households and businesses as the payment system continues to evolve, and may result in faster payment options between countries, there may also be drawbacks,” according to the report.
“They include how to ensure that a CBDC would preserve monetary and financial stability and complement existing means of payment. Other key policy considerations include how to preserve citizen privacy and maintain the ability to fight illicit finance,” the Fed notes.
The paper reviews the national electronic check clearing system which “used dedicated telegraph wires to transfer funds between banks. In the 1970s, the Federal Reserve developed an Automated Clearing House (ACH) system that provided an electronic alternative to paper checks. And in 2019, the Federal Reserve committed to creating the FedNow service, which will provide real-time, 24-hour interbank payments, every day of the year.
Fed officials acknowledge the emergence of “digital wallets, mobile payment apps, and new digital assets such as cryptocurrencies and stablecoins. These technological advances have also led central banks around the world to explore the benefits and potential risks of issuing a CBDC,” according to the document.
The Fed has a list of specifications on what a CBDC should do, including “supplementing, rather than replacing, current forms of money and methods of providing financial services”, “protecting against criminal activity” and ” have broad support from key stakeholders. ”
For what the Fed itself will do, it will “solicit and consider a wide range of views while continuing to explore whether a U.S. CBDC would be appropriate,” and it will take an active role in “developing international standards for the CBDCs”.
The Fed’s initial analysis “suggests that a potential U.S. CBDC, if created, would better meet U.S. needs by being privacy-protected, intermediated, widely transferable, and identity-verified,” according to the report.
So the Fed released the report, wants you to read it, and then wants you to answer 20 questions.
“The Federal Reserve will seek input from a wide range of stakeholders who may use a CBDC or be affected by its introduction. This document concludes with a request for public comment, the first step in a broad consultation that will also include targeted outreach and public forums,” according to the Fed.
To help you get started, here is a link to the report: https://bit.ly/35Jfrs3