This release in Quartz is another take on the Fed’s discussion document on CBDCs that was issued last week and now awaits industry commentary. We had covered our perspective in a post the day after the Fed release and expressed a level of disappointment at the lack of specificity around research results from supposed testing scenarios underway for the past year+. In this case the author poses some of the same conclusions around Fed equivocation, reflected in the title.
‘The US Federal Reserve released its long anticipated report on the potential for a digital dollar last week. Those hoping the world’s most powerful central bank would revolutionize the way we exchange money were disappointed…
For starters, the Fed made clear that for now it is neither for or against launching a digital currency. And if it does decide to issue one, it wants banks to act as intermediaries, not unlike in the system that currently underpins most electronic transactions…
Dozens of central banks around the world have either launched or are exploring the idea of central bank digital currencies, or CBDCs, according to the Atlantic Council’s CBDC tracker. Proponents say this kind of digital money would be cheaper and faster than traditional payment systems, and more efficient for cross-border transactions…
But in several speeches, chair Jerome Powell has made it clear the Fed is operating from a place of confidence in the dollar’s status as the world’s reserve currency. In other words, it doesn’t want to create a CBDC for the sake of creating a CBDC.’
The author then goes on to discuss some of the general awareness things around CBDCs, including progress being made in multiple other global markets as well as reasons why these crypto accounts have generated so much interest, which we have been covering in member research now for quite some time. Reasons for the Fed’s hedging have been laid out in various press statements during the prior year, including from chairman Powell, among others. So, the Fed discussion document is just a formal summary of CBDC strengths and limitations vis-à-vis the Fed’s legal remit, offering up a natural delay and channel for public commentary. The author arrives at a similar conclusion to ours, which is that it would seem inevitable that some form of digital dollar will be issued, and it’s just a matter of when and how.
‘Still, the Fed seems committed to issue some kind of digital currency if it will protect the dollar’s status as the global reserve currency. Fed governor Lael Brainard has said the US needs to digitize the dollar to keep up with financial innovation in other countries—though she hasn’t provided any evidence on why those other countries’ CBDCs would make their currencies more attractive than the dollar. The Fed made a similar case in its new report…
That might not be enough reason for the US to launch a CBDC anytime soon. The dollar is seen as a safe haven asset because the US is good at fulfilling its financial obligations, not because it’s more innovative or easier to use than other currencies. If anything threatens the dollar’s status, it will be political or economic instability in the US, not any other CBDC or cryptocurrency…
Even bitcoin, the oldest digital asset, is valued in terms of the US dollar—despite its advocates’ aim to replace the official currency. At least for now, crypto needs the dollar more than the dollar needs the technological advantages that come with crypto.’
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group