The Federal Reserve is about to publish a report on the benefits and risks of a Central Bank Digital Currency (CBDC), and therefore the hypothetical digital dollar.
This was reported by the Wall Street Journal.
Risks and benefits of a CBDC
It seems that the discussion about the digital dollar is about to officially start in the United States. According to the “possibilists”, a CBDC would have the merit of making payments faster. Opponents, however, fear for the privacy and security of users.
According to the Wall Street Journal, there are also fears within the Fed that a digital dollar would undermine the financial system and put banks in crisis.
There is also an issue that should not be underestimated: the world’s major powers are moving towards issuing a digital currency issued by their respective central banks.
China is well on its way, so much so that the digital yuan could make its debut at the next Olympic Games in Beijing in 2022. The European Union is also studying a digital version of the euro, although the issuing process will take at least four years.
For the United States, the issue is crucial: it is essential not to make the dollar lose its primacy as the strongest currency in the world.
A Fed representative, Lael Brainard, said in this connection:
“It’s just very hard for me to imagine that the U.S., given the status of the dollar as a dominant currency in international payments, wouldn’t come to the table in that circumstance with a similar kind of an offering”.
The Fed’s report on the digital dollar
The Fed’s report on the digital dollar is an assessment that is intended to open a debate by gathering comments and considerations.
It is expected to be followed by the outcome of a Boston Fed study conducted with the Massachusetts Institute of Technology, this time more focused on the technical side of the digital dollar.
Difference between Digital Dollar and cryptocurrencies
The issuance of a digital dollar is also part of the Fed’s strategy to provide an alternative to private digital currencies, including Bitcoin and stablecoins.
This would be a centralized currency and fully controlled by a central bank. Cryptocurrencies such as Bitcoin, by contrast, are the exact opposite, totally decentralized, without intermediaries, and the transaction system is entrusted by validators and certified by the blockchain.
Central banks’ digital currencies are intended to respond to users’ demands for a fast and efficient electronic payment system, such as cryptocurrencies.
The Fed, just like the ECB, cannot ignore this demand, nor can it leave the field open to crypto.