The Federal Reserve is looking into the potential launch of its own digital currency to counter the wave of private currencies. Cryptocurrencies such as Bitcoin have gained popularity paving the way for other initiatives like Libra to take up the role of issuing currencies.
These initiatives have placed the US and its central bank in a very uncomfortable place. This is according to a member of the US central bank board of governors, Lael Brainard, who on Wednesday stated that
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
This has prompted the Fed to consider developing its own digital currency to address such issues whilst responding to a growing demand. Brainard stated that the Fed is
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].
The Fed interest in digital currencies is also driven by the changing financial landscape and growing prominence of e-commerce fuelling the need for alternative payment systems. Accordingly, the Fed views the development of a digital dollar as the best means to achieve this with Brainard saying
By transforming payments, digitalization has the potential to deliver greater value and convenience at lower cost
The Fed is also keen on retaining the dollar’s importance on the global financial sector. Over the past 2 decades the role of the US Dollar as the global reserve currency has been challenged with the rise of regional currencies such as the Euro. Also, other developing and emerging nations have been actively pursuing alternatives requiring the US central bank to innovate in order to retain this privilege.
Brainard attested to this in a speech delivered at the Stanford Graduate School of Business in California saying that the Fed needs to remain on the frontier of both research and policy development of digital currencies. At the same time, she warned that the Fed will evaluate the technology and will create a digital dollar only if it is proven to improve the financial system. This means it should improve payments safety and lower the operational costs without bringing new risks to the system.
The US officials are also working together with the private sector to fine-tune regulations to ensure they are suitable for a digital currency financial ecosystem. In this respect, Brainard stated that the government is considering
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
These sentiments reveal that the Fed is finally warming up to digital currencies and ready to soften its stance of privately issued digital currencies. This is a welcome sign and a step in the right direction in transforming the financial sector.
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