The Federal Reserve is taking is exploring the creation of a digital U.S. dollar. The move could shake up the banking system while giving many low-income earners access to a financial system they might not have otherwise had.
Chairman Jerome Powell, citing the progress of payments technology, said the Fed has been “carefully monitoring and adapting” to those innovations.
“The effective functioning of our economy requires that people have faith and confidence not only in the dollar, but also in the payment networks, banks, and other payment service providers that allow money to flow on a daily basis,” Powell said in a video message.
“Our focus is on ensuring a safe and efficient payment system that provides broad benefits to American households and businesses while also embracing innovation,” he said.
Sens. Elizabeth Warren, D-Mass., and John Kennedy, R-La., are backing the effort for the potential benefits it could offer to people without bank accounts. But banks are putting up a fight.
"The United States should not implement a [central bank digital currency] simply because we can or because others are doing so," the American Bankers Association said, according to Politico. The group added that while the benefits "are theoretical, difficult to measure, and may be elusive," while the negative consequences "could be severe."
In the past few years, the meteoric rise of cryptocurrencies has sparked conversations in the Fed to provide a digital version of the dollar to be used alongside the traditional paper currency. One of the biggest drivers of the idea was a Facebook-led effort in 2019 to allow the use of global payments network using crypto technology. Though the action didn't breach near the scope of widespread use, it did provide an example of how the private sector could create a currency system outside of government control.
So now, a few years later, central banks around the world have started to explore the idea of issuing their own digital currency that would function in the same authority as their physical counterpart while also offering some of the benefits of other cryptocurrencies.
That, however, could provide unwelcome competition for banks by giving depositors the option to store their money in multiple places. In theory, a person or business could keep their digital dollars in a virtual "wallet" then transfer them directly to someone else without using a bank account. But unlike decentralized currencies like Bitcoin and Ether, the money would be backed and controlled by a central bank, wherein monetary authorities could use their digital cash to guide policy decisions regarding interest rates.
Next month, the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology's Digital Currency Initiative will aim to publish the first findings of their work to see if a digital currency could work a practical level.
But ultimately, the decision will be left to Congress to see if the central bank should pursue such a measure. Lawmakers on both sides appear interested in the idea, as they keep one eye out for China in its efforts to develop its own central bank digital currency and another one on the rise of other cryptocurrencies that could diminish the dollar.
But the reaction to make such an adjustment is also drawing concern.
“What problem is a central bank digital currency trying to solve? In other words, do we need one? It’s not clear to me yet that we do,” Sen. Pat Toomey, R-Pa., said. “In my view, turning the Fed into a retail bank is a terrible idea.”
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