Analysis: US Fed Navigates Political Minefield With Looming Digital Dollar Report

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US dollar banknotes are seen on a light table at the Bureau of Engraving and Printing in Washington on November 14, 2014. REUTERS / Gary Cameron / File Photo / File Photo

September 30 (Reuters) – The U.S. Federal Reserve board will soon release a long-awaited report exploring the potential adoption of a digital dollar, but with its governors and other policymakers divided on the issue – and with so many challenges for the financial sector – the central bank will likely be cautious.

Fearing that a cryptocurrency explosion could weaken their grip on the economy, central banks from China to Europe are considering issuing their own digital currencies (CBDCs) and the Fed is under increasing pressure to catch up. delay.

Unlike cryptocurrencies which are typically managed by private players, or electronic money used daily in billions of transactions which is primarily created by commercial banks, some CBDCs would be cash equivalent, issued and backed by central banks. .

CBDCs could be issued for wholesale use, speeding up and reducing the cost of cross-border payments between companies and speeding up the settlement of transactions in stocks and bonds. A digital retail dollar could be used by the general public, expanding Americans’ access to a range of financial services.

But a U.S. CBDC also threatens the stability of the banking system, poses privacy, security and cost concerns, as well as foreign policy concerns, as Fed Chairman Jerome Powell seeks a second term in the face. to opposition from powerful progressive lawmakers. Read more

“There are a lot of political minefields surrounding the central bank’s digital currency that the Fed needs to get around very cautiously,” said David Beckworth, senior researcher at the Mercatus Center and former Treasury economist, adding that Powell is “politically quite enough. smart “to navigate competing issues.

In May, Powell announced that the Fed’s board would release a report exploring payments innovations and the potential adoption of a digital dollar, separate from research the Boston Fed is working on with the Massachusetts Institute. of Technology exploring the technological aspects of a CBDC.

Since then, Powell has said he is “undecided” on adopting a digital dollar. “This is such a fundamental question, it would be ideal if it were to be the product of broad consultation and ultimately authorizing congressional legislation,” he said during a congressional hearing on Tuesday.

Last week, he tempered expectations for the board report, saying the Fed had not made any decisions on a CBDC. The document will address some of the related public policy issues and set the stage for the central bank to seek comments from lawmakers and the public, he added.

Still, Fed watchers say the newspaper will play a key role in shaping the debate on the future of a digital dollar in Washington, and its language will be carefully analyzed to guess in which direction the board may. lean, they said.

“No matter what they say, it will be a very important parameter of the tone,” said Julia Coronado, founder of research firm MacroPolicy Perspectives, who testified before Congress on the need for a digital dollar in July.

While enthusiasts expect the Fed to signal the risks of a digital dollar, they hope it will generally send a positive signal by highlighting use cases and potential benefits.

“If it’s more agnostic and more skeptical, then who’s going to push it forward?” Coronado said.

A Fed spokesperson did not immediately comment.

DIGITAL RIVALS

Although a widely used digital euro, yuan or dollar could be years away, such projects could disrupt the global financial order significantly. Some in Washington fear that the United States will cede its dominance over the global financial system if it does not digitize the dollar, currently the world’s reserve currency.

In particular, China’s late-stage digital yuan pilot project has rocked some that the United States’ biggest economic rival has stolen a march on a key innovation.

Fed Governor Lael Brainard said she found it inconceivable that the United States would not seek a digital dollar as competing economies forged ahead with the CBDCs. “It just doesn’t look like a sustainable future,” she said in July.

Others, however, are strongly skeptical. Fed Governors Christopher Waller and Randal Quarles have argued that many dollar transactions are already digital, and the costs of adopting a CBDC could far outweigh the benefits. Fed staff are also divided on the matter, according to three people briefed on the matter.

On Capitol Hill, some progressives see the digital dollar as a way to make financial services affordable for millions of Americans, currently overpriced by the traditional banking system. Some Congressional Republicans, meanwhile, have raised concerns about privacy and security.

Powerful business interests are also at stake. Read More.

A digital dollar could hurt large lenders by stepping up competition for deposits, and some banking lobby groups have pushed policymakers to act slowly. Major dollar-linked cryptocurrencies could be phased out by a Fed rival.

In the meantime, other private sector players have been pushing for seats at the table, including distributed ledger companies, the United States Chamber of Commerce, and influential CBDC enthusiasts.

“I hope the report upholds the great American tradition of the public sector working with the private sector as policymakers continue to explore the development of a digital dollar,” said Christopher Giancarlo, former regulator and co-founder of the Digital Dollar Foundation nonprofit.

Reporting by Jonnelle Marte and Michelle Price; Editing by Toby Chopra

Our Standards: Thomson Reuters Trust Principles.


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