The Fed is currently committed to developing FedNow, a real-time payments system, but it has just announced it partnered with MIT to build and test a hypothetical digital currency. Depending how that digital currency is implemented, it could obviate the need for FedNow.
However the risk of moving all currency to a digital platform has risks. China for example, may deploy its digital currency in a two-tier deployment model to preserve the commercial bank’s ability to manage circulation. However a two-tier system doesn’t need to be executed on two different technology stacks, so the devil is in the details. Here’s coverage on the announcement from a Business Insider article:
“The program marks a major step forward for the Fed’s interest in digital currencies. Brainard stressed that the Fed isn’t in a position to issue digital cash yet, as “a significant policy process” is needed to even consider issuing a central bank digital currency. The research will involve a “hypothetical” coin oriented to central bank uses, she added.
Still, the bank is committed to understanding such currencies and their implications around the world.
“Given the dollar’s important role, it is essential that the Federal Reserve remain on the frontier of research and policy development regarding [central bank digital currencies],” the Fed governor said.
Brainard indicated in February that the Fed was looking further into regulations and protections for digital payments and currencies. The new technology can potentially bring “greater value and convenience at lower cost,” she said then. The governor also hinted at the Fed’s research into potential use cases for digital currencies.
A digital dollar poses its fair share of benefits and risks. Digitizing government payments would accelerate monetary policy’s impact and payouts for programs including unemployment insurance, social security, and direct payments like the recent coronavirus relief checks. Experts also suggest a digital dollar would help prevent tax evasion and money laundering.
However, some fear the introduction of a central bank digital coin would spark rapid outflows from banks.
Brainard’s Thursday announcement brings the Fed more in line with dozens of central banks around the world. China is moving forward with its own plans to issue a digital coin. The European Central Bank said in 2019 that it will “continue to assess the costs and benefits” of a central bank digital currency, but stopped short of guaranteeing an issuance.”
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group