On November 20, the Chair of the US Federal issued a response to Congress on the issuance of a central bank digital currency. In the letter, Jerome Powell said the Fed was examining if a digital currency would offer any tangible benefits to the US economy. He also said that they were currently looking into several options.
The Fed Is Examining the Benefits of a Digital Currency
This letter was issued in response to a letter sent by two members of the US Congress. In the letter, they wanted to know if the Federal Reserve was looking into the issuance of a CBDC. The two urged the Fed to begin looking into the issue if it was not already doing so.
In its response, the Federal Reserve states it was carefully analyzing the possible benefits of a CBDC to the US economy. According to the letter, the Fed is examining what benefits a CBDC would offer in terms of cost, speed, security, and efficiency. The Fed concludes by saying it has not yet found a compelling reason to issue a digital currency.
Why a CBDC Would Not Make Much of a Difference
In the letter, Jerome Powell claims that the US payments market is already quite efficient. It is also fast, cheap and secure. This is especially so compared to nations exploring the issuance of a digital currency. Besides that, the letter notes that there is heavy use of physical cash in the US economy. Consequently, there is little demand for a digital payment alternative in the current market.
The letter claims that the challenges a CBDC would address are not present in the US. These issues include a poorly developed payments network and narrow reaching banking. The letter also notes that the Fed is still working on FedNow, a payment system that would enable real-time payments for private banks.
Legal Issues
In the letter, Powell also noted that a digital currency would raise several legal issues. To issue a digital currency, the Fed would first need to consider its impact on its monetary policy as well as financial stability. Additionally, the Fed would have to find ways to address the rights of users in such a system. All of these issues have already proven a major obstacle for the Facebook Libra project. Some of the legal issues that would arise with such a digital currency, according to the Fed, including whether users would pay interests, and the supply limits.
The Fed also notes that issuance of a retail CBDC would require the Fed to maintain a running record of all payment data, which would be a major undertaking. It is something that the Federal Reserve does not have to deal with in the current system.
China is reportedly working with Huawei to manage the digital database of its CBDC. This will likely elicit uproar since Huawei has been accused of using its mobile devices to invade the privacy of its users.
Summary
The letter indicates the Fed does not believe a digital currency offers any significant benefits to the US economy. With the developments in other geographic locations such as China and Turkey, it will be interesting to see if the U.S changes their stance long term.
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