Fed Releases Report On Feasibility Of Digital Dollar
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The US Federal Reserve recently released a study that examines the feasibility of launching a digital US dollar. If the Fed were to release such a currency, it would serve as a more stable alternative to existing digital money such as cryptocurrencies.

Details Of The Report

The study examined the feasibility of releasing a Central Bank Digital Currency (CBDC), which would be the digital equivalent to the physical dollar in the US. The use of digital cash is already ubiquitous in the current world. Many transactions today occur in completely digital format. According to one study by the Harvard Business Review, the use of digital transactions accounts for over 97% of all money that is in circulation today.

The study found that China was a leader when it came to central bank digital currencies. It stated that one motivation for China to launch a CBDC was to reduce the dependence on private digital transaction services — WeChat and Alipay. Currently, the two account for nearly 94% of all online transactions valued at $16 trillion. Besides that, launching a CBDC would reduce dependence on cryptocurrencies such as BTC.

Besides China, the study mentions Sweden, Singapore, and South Korea, which are amongst 13 countries conducting CBDC test pilots. The study claims that the US is likely going to follow suit. It noted that MIT was already working with the Federal Reserve Bank of Boston to create a CBDC prototype. It claims the motivation for the US is fear that the digital Yuan by China could threaten its position as the global reserve currency.

Benefits Identified In The Study

In the current system, digital transactions are stored in a commercial bank’s ledger. With a CBDC, the ledger would be managed by the central bank. Currently, only physical cash is backed by the Fed. One potential benefit of such a system would be to streamline cross-border payments. Additionally, it could help to bolster the dollar’s role in international transactions.

Another potential benefit could help to level the innovation playing field. According to the report, private sector firms of small sizes could cut the risk and cost involved in issuing private money. Instead, they could focus on creating new services, and distribution methods.

Potential Risks

The study states that the issuance of a CBDC could come with major risks for the banking sector and financial system. For one, it could reduce the number of people depositing funds in banks. It could thus limit the money banks have to lend to customers.

In a report by Time magazine, the American Bankers Association poured cold water on the idea. It noted that the potential benefits of a CBDC outweigh the potential risks. It stated in a statement that the negative impact on “customers and communities that banks serve could be severe.”

Another risk that comes with the issuance of a CBDC is that all consumer data would be within reach of the government. Besides that, having all of a nation’s financial data stored by one entity could make it enticing to foreign hackers. If a CBDC were issued, tradeoffs between deterring crime and protecting personal data would need to be made.

It is worth noting that with 97% of all financial transactions taking place digitally, the government already has access to all transaction records when needed. Laws governing the banking sector stipulate that all such records can be requested by the government as part of an investigation. It is one of the motivators for people using cryptocurrencies. However, crypto like BTC only offers pseudo-anonymity.

Thus far, no policy decisions have been made by the Fed on the development of a CBDC. However, the report shows that it is working to gain a clear understanding of the feasibility of launching one.

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