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FED

FED Still Working on Its Own Digital Currency

Supporters of the initiative within the FED claim that a digital currency could make money transactions in the financial system faster and cheaper.

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The Federal Reserve (FED) is about to release a paper analyzing the potential benefits and risks of issuing a U.S.-backed digital currency for the first time, as Central Banks such as the European Central Bank study the possibility of issuing their own digital currency, and China launches a pilot of a digital Yuan in its major cities.

Now the members of the FED are divided between the convenience of establishing a digital dollar. This new currency, unlike cryptocurrencies such as Bitcoin or Ether, while it would be digital (like its crypto counterparts), would be issued and backed by the FED itself.

The Boston FED together with MIT are studying the possibility and desirability of the Central Bank issuing its own digital currency. Lael Brainard, who sits on the FED’s Board of Governors, has been particularly enthusiastic about the initiative.

In the past, Powell has indicated that the FED was studying so-called stablecoins and, in fact, appointed a former cryptocurrency pioneer in the brokerage world, Sunayna Tujeda, to support the FED’s efforts to implement a digital dollar.

FED
At the FED there are several supporters of implementing a new digital currency, but there are also skeptics. Jerome Powell’s position remains ambiguous. (Image: EFE)

Supporters of the initiative within the FED claim that a digital currency could streamline and make money transactions in the financial system cheaper and integrate people who have traditionally been outside the financial system or lack a bank account, while making government transfers more effective.

In an interview with Bloomberg, Powell commented that “because we are the primary reserve currency, we don’t have to rush this project and we don’t have to be first to market,” referring to the possibility of the FED implementing its own digital currency.

Other members of the FED, such as Vice Chairman Randal Quarles, are more skeptical of the need to implement a digital dollar, as most of the money in circulation is already digital, since it is not printed but recorded in the bank balances of Americans.

Stablecoins are the main competition for the FED’s digital currency

Powell stated that a good portion of Americans still preferred cash as a medium of exchange. He also noted that the implementation of a digital currency lends certain privacy issues to its users.

In a hearing before the Financial Services Committee, FED Chairman Jerome Powell stated that the central bank had no intention of banning cryptocurrencies. However he did clarify that he considered it appropriate to regulate stablecoins: “Stablecoins function as funds in the money market, like bank deposits, but outside the regulatory perimeter, so it is appropriate that they be regulated,” said Powell.

So-called Stablecoins function as a digital asset-backed by other collateral, including fiat money, cryptocurrencies such as Bitcoin, or an algorithmic backing that determines the number of tokens (money) in circulation in the market. Some Stablecoins such as Tether or USD Coin have one-to-one convertibility with the dollar. Thus, at cryptocurrency brokers, traders exchange their most volatile cryptocurrencies, such as Bitcoin or Ether, for stablecoins whose low volatility allows crypto-investors not to lose the value of their profits while they are not trading in the market.

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