Why the Fed is considering a cash-backed cryptocur...
The Federal Reserve is investigating the potential of a central bank digital currency(CBDC)as the backbone for a new, secure real-time payments and settlements system.The move toward a form of government-backed digital currency is being driven by Fintech firms and a banking industry already piloting or planning to pilot cash-backed digital tokens,according to Lael Brainard, a member of the U.S.Federal Reserve’s Board of Governors.
“Today, it can take a few days to get access to your funds.A real-time retail payments infrastructure would ensure the funds are available immediately—to pay utility bills or split the rent with roommates, or for small business owners to pay their suppliers,” said Brainard,who serves as chair of the committees overseeing Financial Stability and Payments, Clearing and Settlements.
Immediate access to funds could be especially important for households on fixed incomes or living paycheck-to-paycheck, when waiting for funds to be available to pay a bill can mean overdraft fees or late fees that compound.Similarly, for small businesses, immediate access to funds from a sale to pay for supplies can be a game-changer.
Along with benefits, however, a CBDC would also bring potential risk.The prospect for rapid adoption of global stablecoin payment systems has intensified calls for central banks to issue digital currencies in order to maintain the sovereign currency as the anchor of the nation’s payment systems.
At the time, digital tokens for wholesale payments and some aspects of distributed ledger technology could strengthen traditional financial systems and markets, but there are “serious technical and operational challenges that would need to be overcome”.For one, a CBDC might create “a global target for cyberattacks or a ready means of money laundering”.Even though central bank digital currencies may at first glance appear to address a number of challenges associated with the current crop of cryptocurrencies, this appeal may not withstand closer scrutiny.
One reason for Fed’s change of heart from two years ago may be that since that time private efforts to create stablecoins have accelerated, including Facebook’s Libra and JP Morgan’s JPM Coin.Brainard expressed concern that while payments have traditionally been a service provided by “trusted intermediaries such as banks,” fintech firms creating cryotpcurrencies are not under the Fed’s jurisdiction—or its regulatory oversight.“Banks offer important consumer protections,” she said.“Because Facebook has an active user network of one-third of the global population, the company’s Libra global stablecoin project has imparted urgency to the debate over what form money can take, who or what can issue it, and how payments can be recorded and settled,” Brainard said in her latest remarks.“Any stablecoin project with global scale and scope faces a core set of legal and regulatory challenges.”
By creating a digital coin tied to the U.S.dollar and its owner through cryptographic hash keys, consumers and businesses alike would be able to track a token they own on an immutable electronic ledger, and possibly even retrieve it if an error is made after a transfer.In turn, government agencies could trace tokens, and ensure banks are complying with know-your-customer and anti-money laundering laws.More than 80％ of central banks say they’re engaged in some type of central bank digital currency effort, according to Bank for International Settlements’ survey of 66 central banks.
In January, the former chair of the Commodity Futures Trading Commission partnered with Accenture to create the non-profit Digital Dollar Project, which plans to explore the creation of a U.S.Central Bank Digital Currency.To be certain, there are already fast digitized money transaction services.Any person-to-person payment service such as Venmo or Zelle allows consumers to store value in an account and make a nearly instantaneous transfer to another account holder.Federal Reserve banks are developing FedNow, a real-time gross settlement service to allow consumers and businesses to send payments in real time.
In her speech, Brainard admitted that, unlike many foreign central banks, the U.S.Federal Reserve doesn’t have complete authority over payment systems, particularly in retail banking.Given the increase in the number of nonbank payment industry players, Brainard said it may be time to review the nation’s oversight framework and consider giving the Fed explicit authority for general retail payments oversight, as other nations do.A blockchain-based CBDC would essentially remove charges and bottlenecks created through intermediaries who process payments and settle them.