The long-awaited Central Bank Digital Currency (CBDC) report from the United States Federal Reserve has been released.
When it comes to a CBDC, the United States proceeds cautiously, explicitly stating that they are neutral on the issue and do not favor a particular outcome regarding the creation of a CBDC.
However, the Fed recognizes the benefits that a CBDC can bring to banking and payment settlement, as well as the hurdles that would need to be overcome before CBDC implementation becomes a reality.
Here are the key takeaways from the Fed’s “Money and Payments: The US Dollar in the Age of Digital Transformation.” report.
The Federal Reserve recognizes that innovation in the banking and payment settlement space occurs periodically. There have been several advances in these markets that were made possible by new technology that enabled innovation. The Fed believes that blockchain technology and digital currency can be one of these innovations that can improve the world of banking and payment settlement, which is why the Fed has been exploring the technology, the benefits it presents and the drawbacks it brings. entails.
How a CBDC can improve America’s banking and payment systems
The Fed knows that the banking and payments system has room for improvement. Their report stated: “7 million, or more than 5 percent of American households, remain unbanked. [And] nearly 20 percent more have bank accounts but still rely on more expensive financial services like money orders, check cashing services and payday loans.”
The report notes that cross-border payments often come with high transaction fees, as well as slow payment settlement times due to time zone differences.
“As of the second quarter of 2021, the average cost of sending a remittance from the United States to other countries was 5.41 percent of the notional value of the transaction. These high costs have a significant impact on households that carry out remittance transactions. The high costs of cross-border payments also affect smaller companies that make infrequent global payments to suppliers. Reducing these costs could benefit economic growth, improve global trade, improve international remittances, and reduce inequality,” he stated.
Given the native features of most digital currencies, such as near-instantaneous payment settlement time, low transaction fees that are often less than a penny, the low barrier to entry given that most blockchain networks are and the ability to program money, the Federal Reserve sees digital currency as a monetary tool that could reduce the number of unbanked and underbanked people in the United States, while lowering the costs associated with remittances and cross-border payments.
“A US CBDC would offer the general public broad access to digital money that is free of credit risk and liquidity risk. As such, it could provide a secure foundation for private sector innovations to meet current and future needs and demands for payment services,” the Fed report said.
“A CBDC could generate new capabilities to meet the changing speed and efficiency requirements of the digital economy. As noted above, for example, a CBDC could potentially be programmed to deliver payments at certain times. Additionally, a CBDC could potentially be used to make micropayments, financial transactions that typically occur online and involve very small sums of money, that traditional payment systems are not necessarily designed to facilitate.”
The implementation of a CBDC would create a new set of problems for both the central bank and the residents of the United States. The creation of a CBDC would mean that a new form of money would enter the economy, which would alter the structure of the banking and payment settlement system. Experts at blockchain research firm nChain hope that countries of all sizes and economic developments will now realize the benefits of blockchain technology and establish national digital currencies. Simit Naik, nChain Strategy and Commercial Director, saying: “Central banks have more clarity on their requirements and the benefits of using a public blockchain to offer CBDC that is more like cash.”
For the Federal Reserve, the main concerns are that digital assets could exacerbate bank runs, reduce the availability of credit in financial markets, and have the potential to disrupt the current concentration of economic power.
“Because central bank money is the safest form of money, a widely accessible CBDC would be particularly attractive to risk-averse users, especially in times of stress in the financial system. The ability to rapidly convert other forms of money, including commercial bank deposits, into CBDC could make runs on financial firms more likely or more severe. Traditional measures such as prudential supervision, government deposit insurance, and access to central bank liquidity may be insufficient to prevent large deposit outflows from commercial banks to CBDCs in the event of a financial panic,” he said.
“Banks currently rely (largely) on deposits to finance their loans. A widely available CBDC would serve as a close or, in the case of an interest-bearing CBDC, almost a perfect substitute for commercial bank money. This substitution effect could reduce the total amount of deposits in the banking system, which in turn could increase bank financing costs and reduce the availability of credit or increase credit costs for households and businesses.
How to reduce the risks associated with CBDC
The Fed References a document of the President’s Working Group (PWG), which raises the same concerns around a CBDC that the Fed has. The PWG report said the solution would be for Congress and lawmakers to create regulatory frameworks that would mitigate the risks associated with implementing a CBDC; however, the report acknowledges that there are currently gaps and uncertainty regarding who has the authority to regulate CBDCs.
The Fed seeks information from experts
Overall, the report indicates that the Federal Reserve has blockchain and digital currency on its radar and that it will continue to investigate these technologies until there is sufficient evidence that they are beneficial and that they should be implemented in the banking and payment system, or that they come with too much. risk and should not be implemented.
“The Federal Reserve will only take further steps to develop CBDC if research points to benefits to households, businesses, and the broader economy that outweigh downside risks, and indicates that CBDC is superior to alternative methods. Furthermore, the Federal Reserve would only pursue a CBDC in the context of broad public and intergovernmental support,” the report revealed.
To catalyze this initiative and better understand CBDCs, The Fed is looking for information Expert is accepting comments on its specific set of questions until May 20, 2022.
See: US Congressman Bill Foster on Bitcoin Association Blockchain Policy Issues
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