The Fed on Crypto
The Fed on Crypto
The Fed has issued a paper entitled “Money and Payments: The US Dollar in the Age of Digital Transformation” which begins a discussion between the Federal Reserve and stakeholders concerning central bank digital currencies (CBDC), defining same as ‘a digital liability of a central bank that is widely available to the general public’, however the Fed is careful to state that the paper does not signal that the Fed will make any imminent decisions about the appropriateness of issuing a US CBDC. Citing the advent of private sector financial products such as digital wallets, mobile payment apps, and assets such as cryptocurrencies and stablecoins, the Fed has been studying the potential benefits and risks of issuing a CBDC.
The basic criteria that the Fed considers when evaluating such an issuance are:
The Fed seemed to favor stablecoins in the paper, as an alternative to other cryptocurrencies, as they are linked to financial assets, while other cryptocurrencies are mined, creating an unlimited supply with significant energy consumption. Currently most cryptocurrency exchanges do not charge a fee for stablecoin conversions, while they do for most other cryptocurrencies, making them attractive to novice traders, however regulations and accounting rules for stablecoins are still in early stages and the Fed was cautious about a number of risks including destabilization runs and concentration of power in regard to stablecoins, urging Congress to enact legislation that would ensure that stablecoin payment arrangements were made under a federal regulatory framework.
That said, the Fed sees a CBDC as a way to open digital payments, such as those made through Fed systems to banks, available to the public, although they note that as a direct liability of the Federal Reserve a CBDC would not need deposit insurance to garner the trust of the general public, making it “the safest digital asset available to the general public, with no associated credit or liquidity risk.” Further, “While no decisions have been made on whether to pursue a CBDC, analysis to date suggests that a potential US CBDC, if one were to be created, would best serve the needs of the United States by being privacy protected, intermediated, widely transferrable and identity verified”, which sounds quite a bit like a tacit endorsement.
As to how the Fed sees the use of CBDC on a daily basis, they aver that all CBDC transactions would need to be final and completed in real time, allowing users to make payments to one another using a risk-free asset. “Individuals, businesses, and governments could potentially use a CBDC to make basic purchases of goods and services or pay bills, and governments could use a CBDC to collect taxes or make benefit payments directly to citizens. Additionally, a CBDC could potentially be programmed to, for example, deliver payments at certain times.” However, they also see such a product as one that could level the playing field for private sector firms of all sizes, helping smaller firms that do not have the resources to issue their own safe and secure private assets.
As the paper delves further into what a CBDC might do to help the US financial systems it seems more obvious that the Fed is both looking for a way to enter the ‘cryptocurrency’ market without the risks and volatility that most such currencies contain, and is looking down the road to the eventuality of a cashless society, albeit one where Federally directed monetary policy would be influenced by CBDC reserve demand, making it an even more complex structure to manage from a fiscal perspective. There are mentions of privacy, since the use of intermediaries would be needed as the Fed would not be offering CBDC accounts to the general public, and safeguards to prevent financial crimes, but the Fed seems to be edging toward coming up with a plan that would allow it to gain a level of control over the cryptocurrency ‘wild west’ that exists today, which certainly needs ‘corralling’, especially when one looks at the list of cryptocurrencies that trade at least $1 in daily volume. There are 8,347 cryptocurrencies in that list and many more that trade less than $1 volume/day, so the field is ripe for some sort of regulation and/or central system that would make it stable, while helping to bring the Fed into the 21st century. The Fed is open to comments until May… .
The Fed has issued a paper entitled “Money and Payments: The US Dollar in the Age of Digital Transformation” which begins a discussion between the Federal Reserve and stakeholders concerning central bank digital currencies (CBDC), defining same as ‘a digital liability of a central bank that is widely available to the general public’, however the Fed is careful to state that the paper does not signal that the Fed will make any imminent decisions about the appropriateness of issuing a US CBDC. Citing the advent of private sector financial products such as digital wallets, mobile payment apps, and assets such as cryptocurrencies and stablecoins, the Fed has been studying the potential benefits and risks of issuing a CBDC.
The basic criteria that the Fed considers when evaluating such an issuance are:
- provide benefits to households, businesses, and the overall economy that exceed any costs and risks;
- yield such benefits more effectively than alternative methods;
- complement, rather than replace, current forms of money and methods for providing financial services;
- protect consumer privacy;
- protect against criminal activity;
- have broad support from key stakeholders
The Fed seemed to favor stablecoins in the paper, as an alternative to other cryptocurrencies, as they are linked to financial assets, while other cryptocurrencies are mined, creating an unlimited supply with significant energy consumption. Currently most cryptocurrency exchanges do not charge a fee for stablecoin conversions, while they do for most other cryptocurrencies, making them attractive to novice traders, however regulations and accounting rules for stablecoins are still in early stages and the Fed was cautious about a number of risks including destabilization runs and concentration of power in regard to stablecoins, urging Congress to enact legislation that would ensure that stablecoin payment arrangements were made under a federal regulatory framework.
That said, the Fed sees a CBDC as a way to open digital payments, such as those made through Fed systems to banks, available to the public, although they note that as a direct liability of the Federal Reserve a CBDC would not need deposit insurance to garner the trust of the general public, making it “the safest digital asset available to the general public, with no associated credit or liquidity risk.” Further, “While no decisions have been made on whether to pursue a CBDC, analysis to date suggests that a potential US CBDC, if one were to be created, would best serve the needs of the United States by being privacy protected, intermediated, widely transferrable and identity verified”, which sounds quite a bit like a tacit endorsement.
As to how the Fed sees the use of CBDC on a daily basis, they aver that all CBDC transactions would need to be final and completed in real time, allowing users to make payments to one another using a risk-free asset. “Individuals, businesses, and governments could potentially use a CBDC to make basic purchases of goods and services or pay bills, and governments could use a CBDC to collect taxes or make benefit payments directly to citizens. Additionally, a CBDC could potentially be programmed to, for example, deliver payments at certain times.” However, they also see such a product as one that could level the playing field for private sector firms of all sizes, helping smaller firms that do not have the resources to issue their own safe and secure private assets.
As the paper delves further into what a CBDC might do to help the US financial systems it seems more obvious that the Fed is both looking for a way to enter the ‘cryptocurrency’ market without the risks and volatility that most such currencies contain, and is looking down the road to the eventuality of a cashless society, albeit one where Federally directed monetary policy would be influenced by CBDC reserve demand, making it an even more complex structure to manage from a fiscal perspective. There are mentions of privacy, since the use of intermediaries would be needed as the Fed would not be offering CBDC accounts to the general public, and safeguards to prevent financial crimes, but the Fed seems to be edging toward coming up with a plan that would allow it to gain a level of control over the cryptocurrency ‘wild west’ that exists today, which certainly needs ‘corralling’, especially when one looks at the list of cryptocurrencies that trade at least $1 in daily volume. There are 8,347 cryptocurrencies in that list and many more that trade less than $1 volume/day, so the field is ripe for some sort of regulation and/or central system that would make it stable, while helping to bring the Fed into the 21st century. The Fed is open to comments until May… .
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