US Federal Reserve Exploring Digital Dollar and Its Effect on Monetary System

The United States Federal Reserve System is exploring the development of a central bank digital currency (CBDC) and what issues and risks it could potentially pose.

Federal Reserve Board Chairman Jerome Powell provided a response to U.S. Representatives French Hill and Bill Fosters’ request on whether the Federal Reserve plans to launch a national digital currency, financial services reporter Zachary Warmbrodt tweeted on Nov. 20.

In the letter, Powell set forth the Federal Reserve’s views on the creation of a CBDC, emphasizing that, although the agency is not currently developing a CBDC, it has assessed and continues to evaluate the costs and benefits of such an initiative.

Powell revealed that the agency is conducting its own small-scale, research-focused experiments to gain hands-on experience and better understand the opportunities and limitations of CBDCs.

CBDCs raise a range of legal concerns

Powell said that prior to issuing a CBDC, the Federal Reserve has to address a number of legal questions, including monetary and payments policies, financial stability, supervision and operational issues, and their vulnerability to cyber-attacks. Powell continued saying:

“If it is designed to be financially transparent and provide safeguards against illicit activity, a general purpose CBDC could conceivably require the Federal Reserve to keep running record of all payments data using the digital currency [...] and sometimes that raises issues related to data privacy and information security.”

Lastly, Powell noted that a number of design features should be considered for the development of a CBDC, including the governance of the outstanding stock of such a currency, the necessity of a Federal Reserve payment system to conduct transactions and the issue of anonymity in regard to owning and transacting a CBDC.

Representatives’ response to the letter

In response to Powell’s letter, Rep. Hill expressed enthusiasm that the Federal Reserve is exploring whether there is a point to issuing a CBDC, and said:

“This decision would have far-reaching implications on every aspect of America’s monetary policy and requires a deep level of analysis to ensure proper implementation.”

Rep. Foster said: “My main concern is that we are not caught flat-footed by fast moving developments in other countries that may put our economy at a competitive disadvantage and threaten the primacy of the U.S. dollar.”