Last week Fed Chair Jerome Powell announced a rare public video to publish plans for a discussion paper on digital payments this summer. It will include the pros and cons of any U.S. central bank digital currency or CBDC.
On Monday, Governor Lael Brainard suspended him. Brainard leads the Fed’s financial stability and payment systems efforts. He laid out what risks may occur if the fast-developing digital payment space gets too fragmented.
Brainard stressed that it was indispensable for the United States to be at the board to develop cross-border standards. Like China’s, some foreign central banks have already started rolling out digital currencies of their own.
Central bank digital currencies vary from bitcoin, which are decentralized and can fluctuate wildly in value. A CBDC would grant whoever holds it – be it a company, a person, or a government – a primary claim on that central bank, the same as physical cash.
What Are Some Possible Benefits of A U.S. CBDC?
As Brainard set it, a guiding policy for any payments innovation should advance upon the existing payments system.
To that end, a CBDC could increase entrance to the banking system for people who can’t access it due to the high fees or other limitations. Hence, it could also be a more effective way to distribute government payments, like those given to households during the epidemic. Furthermore, it could also help with more routine disbursements such as monthly Social Security checks.
And, as new kinds of private money like “stablecoins” develop, a Fed-sponsored CBDC could attain as a safe choice for consumers and businesses because the private issuers may not forever be able to honor their obligations. In opposition, the Fed always can, Brainard stated.
What Are the Risks?
The dollar is the world’s reserve currency, selling the U.S. government’s exempt standing as a borrower on global markets. As stated by International Monetary Fund data, it considered for approximately 60% of official global foreign exchange reserves at the close of 2020. China’s yuan, by contrast, values at just 2.25%.
Any failure in developing and expanding a U.S. CBDC that cuts that status could hurt the country’s financial standing. Hence, with more than $21 trillion in federal debt, that is a top concern for the Fed.