U.S. Federal Reserve looking at potentially issuing its own digital currency

In a statement, Governor Lael Brainard of the U.S. Federal Reserve stated, the central bank is looking at a broad range of issues surrounding digital currencies and payments, including design, policy and legal considerations around potentially issuing its own digital currency.

The development underscores an openness in the possibility of the Federal Reserve issuing its own digital currency.

“By transforming payments, digitalization has the potential to deliver greater value and convenience at lower cost,” said Brainard at a conference on payments at the Stanford Graduate School of Business.

She went on to add, “But there are risks,” revolving around the rise of private digital payment systems and currencies, including Facebook’s Libra digital currency project.

“Some of the new players are outside the financial system’s regulatory guardrails, and their new currencies could pose challenges in areas such as illicit finance, privacy, financial stability and monetary policy transmission,” she said.

Globally, central bank are debating on best to leverage the blockchain technology – a distributed ledger systems used by bitcoin which promises instantaneous payments at significantly reduced costs.

The U.S. Federal Reserve is developing its own real-time payments and settlement service and is currently reviewing 200 comment letters submitted in 2019 about the proposed service’s scope and design, said Brainard.

She also mentioned that the Fed is also, “conducting research and experimentation related to distributed ledger technologies and their potential use case for digital currencies, including the potential for a CBDC (central bank digital currency).”

Dozens of central banks around the globe are also doing such work, showed a recent international study.

Less than two years ago, at a conference in San Franciso, Brainard had said, there is “no compelling demonstrated need” for such a digital currency. This was before Facebook’s digital currency ambitions were widely known.

Officials, including those from the Fed have raised concerns around data protection and privacy threats posed by a currency, such as Libra, that could come into use by the one third of the world’s population who have Facebook accounts.

In the conference, Brainard mentioned that Facebook’s Libra project “imparted urgency” to the conversation around digital currencies. “We are collaborating with other central banks as we advance our understanding of central bank digital currencies”.

With more countries looking into issuing their own digital currencies,adds to “a set of reasons to also be making sure that we are that frontier of both research and policy development” said Brainard.

Issues which need include whether digital currency would make payments systems safer or simpler, and whether it could pose financial stability risks, including the possibility of bank runs if money can be turned “with a single swipe” into the central bank’s digital currency. Other issues include fraud protection and privacy risks and whether the coin could be considered legal tender.

“In the United States no less than in other major economies, the public sector needs to engage actively with the private sector and the research community to consider whether new guardrails need to be established, whether existing regulatory perimeters need to be redrawn, and whether a CBDC would deliver important benefits on net,” said Brainard.

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