Will The U.S. Federal Reserve Go Digital?

Last week, the Federal Reserve (the central bank of the U.S.) published an official report as a "first step" towards discussions between the Federal Reserve and stakeholders about Central Bank Digital Currencies (CBDCs). With China already leading the world with the roll out of its digital yuan program, other nations are looking at the possibility of moving towards currency digitization.

In the U.S., we already are a largely cashless society. Our paychecks are electronically deposited, and apps like CashApp, Venmo, and PayPal offer those with little or no access to banking a way to transact and participate in the economy. Some establishments don't even accept cash anymore.


True story -- I used cash the other day and despite the register telling the cashier what the change was, she had no idea had to count it out. I had to tell her which coins to grab. If that itself is not indicative of the state of cash in society, I don't know what is. Is that a math problem, cash problem, or both? Either way, it's not looking good. Will learning to count money be removed from the k-12 curriculum like cursive handwriting was?


Anyway, while no policy or decision has been made as to whether or not the U.S. will adopt a digital currency program, they did have this to say:

"The Federal Reserve is committed to soliciting and reviewing a wide range of views as it continues to study whether a U.S. CBDC would be appropriate. Irrespective of any ultimate conclusion, Federal Reserve staff will continue to play an active role in developing international standards for CBDCs."

In short, the U.S. Federal Reserve is in no rush to be "first" to this stage; they would much rather get it right.


You can read the full report here: Money and Payments: The U.S. Dollar in the Age of Digital Transformation


A disclaimer in the report states: "The paper is not intended to advance any specific policy outcome, nor is it intended to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a U.S. CBDC."


Basically, they are saying don't get too excited. There are no digital currency programs or policy (yet). But it clearly is a topic on the table for serious discussion at the Fed, which is where monetary policy is born, so it'd be smart to keep an eye on this.



Federal Reserve Background


Early Years: Established a national check-clearing system and used dedicated telegraph wires to transfer funds between banks.


1970s: Developed an automated clearinghouse (ACH) system that offered an electronic alternative to paper checks.


2019: Committed to building the FedNow Service, which will provide real-time, around-the-clock interbank payments, every day of the year.

Today: Researching the feasibility of transitioning from cash to a central bank digital currency.

Current State of Technology and Currency


Private-sector financial products and services such as digital wallets, mobile payment apps, and digital assets (cryptocurrencies and stablecoins) have emerged, and become quite popular, which has led central banks like the U.S. Federal Reserve and many others around the world to analyze the benefits and risks of a national digital currency.


The Fed believes Central Bank Digital Currency (CBDC) should have the following aspects:

"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; and have broad support from key stakeholders."

That all sounds pretty reasonable but, security is a major concern with anything digital. What does security for a national digital currency even look like and who is responsible for that? The Fed? A third-party?


At the most basic level of thinking on the subject, what happens when the power or network goes out for any length of time, and no one has cash?

I have so many questions!


Here's what else they had to say in the report:

"The Federal Reserve's initial analysis suggests that a potential U.S. CBDC, if one were created, would best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified."

Preliminary examples of benefits and risks from the report:


Benefits -- it could provide households and businesses a convenient, electronic form of central bank money, with the safety and liquidity that would entail; give entrepreneurs a platform on which to create new financial products and services; support faster and cheaper payments (including cross-border payments); and expand consumer access to the financial system

Risks -- how it might affect financial-sector market structure; the cost and availability of credit; the safety and stability of the financial system; and the efficacy of monetary policy.


If you want to read the full report (and I recommend everyone does) visit the website and if you scroll halfway down the page, you will see the section for submitting public comments.


The Fed is seeking answers to 22 questions by May 20, 2022, using the form at https://www.federalreserve.gov/apps/forms/cbdc. It is not a requirement that all questions be answered. To see the list of 22 questions, visit the report and scroll down the page about halfway.


As for me, I am undecided about supporting the transition to a digital currency as the legal tender. I need more data. It makes sense, but there are just too many unknowns, especially when it comes to security (of computers, accounts, and the financial/banking sector) and stabilization of the economy and people in it. Like the Fed, I am forming my opinions and viewpoints over time as the information comes in.



What are your thoughts on the topic of moving from cash to a digital currency as the legal tender in the United States?


Source: Board of Governors of the Federal Reserve System, United States, Jan 20, 2022


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