12.7 Federal Reserve’s view towards digital curren...
Policy makers and regulators in the United States have not developed an overarching framework for regulating private digital currencies till December 2019.The field has been seen as too new for a comprehensive regulatory response.To be sure, the digital nature of new private currencies will raise challenges to which policy makers must respond.It should also be aware that the U.S.Commodity Futures Trading Commission (CFTC), which is tasked with regulating commodity, futures and derivatives markets, first determined that virtual currencies,also known as cryptocurrencies, are commodities in 2015.And in 2018, virtual currencies like Bitcoin can be regulated as commodities by the CFTC, a federal judge ruled.
At the same time, in 2019, the head of the US Federal Reserve Jerome Powell confirmed that the Reserve has analyzed whether a digital currency makes sense for the US and that it has been considering several options.It turned out that the Federal Reserve has indeed “assessed and continues to carefully analyze the costs and benefits of pursuing such an initiative in the US”.It is currently exploring whether a digital currency would “lead to safer, less expensive,faster, or otherwise more efficient payments”.But for the US, the Reserve has yet to find a compelling case for a CBDC.Powell wrote that the US has a competitive payments market with fast and cheap services, particularly in comparison to other nations exploring a CBDC.There also remains a high usage of cash and hence little current demand for a digital alternative.
“To date, our observation is that many of the challenges CBDCs hope to address do not apply the US context including disuse of physical cash, narrow reaching or high concentrating banking, or, poorly developed payment infrastructure,” he summarized.And it points out that the central bank is still working on FedNow, its real-time payment system for private banks.Powell then noted that a digital currency poses “several significant legal questions”.The Federal Reserve considered the rights of users, and the impact on monetary policy and financial stability.All issues Libra has been scrutinized for.The questions include: would the CBDC pay interest? Would there be limits on supply? How would the central bank deal with liquidity from the private sector? The latter “entails the risk of exacerbating runs from private markets”.In particular, a retail CBDC may require the Reserve “to keep a running record of all payment data”, a significant undertaking and something that physical cash does not need.