The Fed Considers Coining a Digital Dollar
February 6, 2020
The most likely U.S. scenario is parallel work crafting CBDC in concert with the Fed’s launch of real-time payments. Decisions on whether U.S. CBDC will be token or account-based, cross-border or domestic, and retail versus wholesale define the future of financial intermediation, banking, financial structure, and wealth distribution.
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Although conventional wisdom discounts the likelihood of a U.S. central bank digital currency (CBDC), FedFin forecast its importance last summer. Chairman Powell’s letter late last year to Congress was widely seen as rejecting U.S. CBDC, but we read it differently, noting for example Mr. Powell’s carefully-announced discussion and the revelation that the Fed was already launching small-scale CBDC experiments. Other Fed officials have said that launch of FedNow will force the Fed’s CBDC hand. Gov. Brainard yesterday did not draw a direct link between real-time payments and CBDC, but she made it still more clear that the U.S. central bank is taking CBDC very, very seriously.
This comes in concert with efforts by a group of global banks the Fed has not yet joined, a group indicating today that they will meet in early spring to advance a global CBDC in response to an increasingly weaponized U.S. exchange-rate policy. Gov. Brainard yesterday made it clear that the Fed’s focus on CBDC is in part designed to protect the dollar’s reserve-currency status. However, she made it clear that the Fed is keenly aware that, if it is slow crafting a U.S. digital currency, then others – likely unregulated nonbanks – will do it instead.
How the Fed proceeds has far-reaching strategic impact. If, for example, the Fed elects a digital “token” form of CBDC, then the Fed could become the nation’s largest depository. An account-based system could include commercial banks or, for that matter, giant tech companies within the ambit of U.S. CBDC, but the rules governing the new money system and its interaction with the payment system poses strategic, systemic, and even equality challenges. Notably, Republicans earlier this week strongly supported CBDC as a way to speed new payment services for lower-income households, but Democrats feared that migration of core services outside the regulatory perimeter could take predatory finance into new realms of deposit-taking and high-cost transaction services.
Politicians are already engaged because market participants are rapidly developing products to circumvent traditional regulation and redefine the payment system with or without the Fed. The Fed may have to hurry.
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