Fed exposes in document risks and benefits of digital currency of the central bank; does not take a stance

By Jonnelle Mars

Jan 20 (Reuters) – Creating an official digital version of the dollar could speed up payments and offer households a secure option as technology evolves, but would also pose financial stability risks and privacy issues, the Fed said. Federal in a long-awaited discussion paper released Thursday.

The document makes no monetary policy recommendations and does not provide a clear signal on the Fed’s position on the possibility of launching a central bank digital currency (CBDC). In addition, the agency said it would not proceed to create one “without clear support from the executive branch and from Congress, ideally in the form of a specific authorization law.”

But it lays the groundwork for the central bank to seek public input on the potential costs and benefits of this approach, which the world’s major economies are increasingly exploring.

“Although a CBDC could provide a secure digital payment option for households and businesses as the payments system continues to evolve, and could result in faster payment options between countries, there may also be downsides,” the officials wrote. of the Fed in the report.

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Challenges include maintaining financial stability and ensuring that the digital dollar “will complement existing means of payment,” the Fed said.

The central bank must also address important policy issues before embarking on a CBDC, such as ensuring that it does not violate Americans’ privacy and that the government maintains its “ability to combat illicit finance.”

Although it makes no recommendations, the document sheds some light on how a CBDC might work in practice.

One of the main conclusions of the analysis was that a CBDC would “be better suited” to the needs of the United States if it were “brokered” through the current financial system, meaning that individuals would not hold CBDC accounts directly with the Fed.

However, officials said they are not ruling anything out. The document, which was announced last year by Fed Chairman Jerome Powell, outlines the payments landscape, including the emergence of stablecoins and other cryptocurrencies.

“The document is not intended to anticipate any specific results, nor is it intended to indicate that the Federal Reserve will make any imminent decision on the advisability of issuing a US CBDC,” says the letter.

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Powell has made it clear that he would like such a bill to have broad support and, ideally, to be the product of congressional action. The Fed board is generally divided on the need for a CBDC.