Digital money is under scrutiny from the Fed

A US government-backed digital dollar could lead to faster money transfers and be more accessible than the current banking system, according to a new document from the Federal Reserve (via CNBC).

The document is meant to act as “the first step in a discussion” and does not advocate the creation of a “central bank digital currency” (or CBDC). Yet, the creation of a digital dollar would be a massive shift in the importance of the role government would play in our finances. Potential downsides could include making commercial banks less attractive to consumers and affecting the Fed’s ability to influence the financial system. The Fed is now inviting comment, including anything the paper may have missed.

The document, a step towards the existence of a digital dollar, comes at a time when about 90 other countries are considering their own digital currencies, according to Reuters. The European Central Bank is studying the creation of a digital euro, and China is testing a digital yuan, which it has been working on since 2014. Meanwhile, in the world of cryptocurrencies, stablecoins, some of which tie their value to the US dollar, have grown in importance.

The government also seeks to continue to support “the dominant international role of the US dollar,” as the newspaper put it. Doing its research in public could help the government make it easier for other companies to design systems compatible with those in the United States, because Bloomberg points out.

A central bank digital currency could combine some of the benefits of federally backed cash and privately controlled digital cash, such as:

  • Quick and easy transfers between individuals and businesses (even cross-border)
  • More accessibility for people without bank accounts, who may have difficulty opening accounts at private financial institutions
  • More security and consumer confidence – banks may fail or run into liquidity problems, which is less likely with the US government

There are also the potential downsides: the government would have to manage the market’s reaction to the US taking over a role traditionally played by commercial banks. It would also require citizens to trust the government directly with all their financial information, although the document vaguely states that this concern could be alleviated by allowing “intermediaries” to address privacy concerns “leveraging existing tools”.

A digital currency does not need to be blockchain-based. The Fed, in its post, clarifies that no specific design or technology has yet been proposed, saying it “will continue to explore a wide range of design options.”

If the central bank were to create a digital currency, it would have to be “privacy-protected, intermediated, widely transferable, and identity-verified,” according to the document. The reserve is currently experimenting and exploring centralized, blockchain and distributed methods to create currency.

If you are interested in the future of silver, the document is well worth a read. And if you have expertise or strong opinions on this subject, you will have plenty of time to express them by going through the 22-point questionnaire.

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