The chairman of the U.S. Federal Reserve Jerome Powell recently spoke at an International Monetary Fund (IMF) annual meeting entitled "Cross-Border Payments - A Vision for the Future." His speech clarified the US Federal Reserve's position in regards to the implementation of a digital version of the US dollar.
The seminar, moderated by IMF Managing Director Kristalina Georgieva, discussed potential solutions to enhancing cross-border payments, in particular through the utilisation of digital currencies. Other panelists at the seminar included Ahmed Abdulkarim Alkholifey, Governor of the Saudi Arabian Monetary Authority, BIS General Manager Agustín Carstens and Bank Negara Malaysia Governor Nor Shamsiah.
Speaking on the topic of digital currencies, Powell addressed the growing global interest in Central Bank Digital Currencies, or CBDC's. In the past year, several nations have experimented with the possibility of introducing a digital version of their local currency. Last week, China announced a successful pilot of its 'digital renminbi' which has already seen 1 billion yuan ($150 million) in transactions completed this year.
Taking Back Control
In a recent interview with financial newswire Barrons, Sino Capital CEO Matthew Graham said the introduction of a digital yuan represents Beijing's hopes of redirecting power back to the state. The country famously banned the use of cryptocurrencies such as Bitcoin back in September 2017, but continues to see competition from alternative digital payments systems like WeChat and Alipay.
The US has yet to suffer a similar threat to its dollar hegemony but is becoming increasingly aware of the potential competition that cryptocurrencies present. Until now it has been unclear on its position regarding the topic, leaving many to question if the Federal Reserve has any plans for a 'digital dollar'.
“We have not made a decision to issue a CBDC," said Powell, "and we think there is a great deal of work to be done before making such a decision."
Despite the lack of a definitive decision at this time, Powell assured US citizens that the Fed is actively researching the possibility of a CBDC in partnership with other central banks and the Bank for International Settlements (BIS). To this end, the Fed chairman has stated that researchers at the Massachusetts Institute of Technology (MIT) are currently working on a "hypothetical central bank digital currency" in collaboration with the Federal Reserve Bank of Boston.
A Double-Edged Sword
Powell went on to stress the importance of developing adequate security measures to protect against cyber attacks, counterfeiting and fraud. The use of existing digital currencies like Bitcoin for illicit activities such as money laundering has caused much controversy of late, so this will likely be a strong focus of the team during any deliberations on the subject.
Benefits of a CBDC, as mentioned by Powell, include faster and cheaper transactions and the ability to better serve those that lack access to funding from traditional financial institutions. Earlier this year, economists noted how a digital dollar could have helped to hasten the delivery of stimulus checks to those in need during the early stages of the coronavirus pandemic. However, rushing into a hasty solution at this time is not an option the Fed is willing to entertain.
"We do think it’s more important to get it right than to be first, and getting it right means that we not only look at the potential benefits of a CBDC but also the potential risks," Powell continued.
The preservation of user privacy and security was highlighted as a key factor for consideration, although this would presumably not include privacy from the eyes of the Fed.
A common trend amongst those who support decentralised digital currencies such as Bitcoin is the privacy and financial independence that they offer, a benefit not likely to be passed on by a CBDC. Rather than reign in the revolutionaries, this lack of cohesion in the digital financial space threatens to further distance libertarian economics from a government controlled currency.
So Why Do We Need Digital Currencies?
Digital currencies remain a niche financial asset, made famous only recently by the growing popularity of Bitcoin and other cryptocurrencies. One of the most widely touted benefits of digital currency is the ability to send money abroad at a fraction of the cost that the current banking systems offer.
Private American companies like Ripple have already begun using blockchain-based digital currencies to provide users with extremely low-cost, near-instant international remittance. However, due to strict US regulations in regard to the use of cryptocurrencies, Ripple CEO Brad Garlinghouse has threatened to relocate the thriving business overseas.
With cryptocurrencies growing ever more popular by the day, governments and banks are beginning to see the potential threat that these unregulated digital currencies pose on both financial stability and governmental control. As the technology becomes safer and more accessible, a growing number of citizens are beginning to realise the benefits of a digital cash system that requires no banking or federal oversight.
However, the system is not without faults - faults that criminals have been quick to take advantage of, resulting in a delegitimisation of the emerging digital currency market.
With the development and implementation of CBDC's, governments hope to reign in this financial revolution by providing the same solutions that cryptocurrencies do.
Subsequently, and by including what many perceive to be an added layer of trust, they hope to maintain a grip on this fast-unravelling global economy. The likelihood is that, barring a few libertarian outliers, the majority of citizens will trust a government-issued digital currency over that of an unregulated and unaccountable cryptocurrency.
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