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The digital dollar is close

Photo of: Joseph Stone
by Joseph Stone

The Board of Governors of the Federal Reserve and several Federal Reserve Banks are actively working on the digital dollar. Legislation has proposed that every American should be able to have an account at the Fed to make transactions in the central bank’s digital currency.

Cleveland Federal Reserve Bank President Loretta J. Mester described the Fed’s work on digital currency to the country’s central bank (CBDC) in a speech Wednesday at the 20th Anniversary Chicago Payments Symposium. Noting that the experience with emergency payments led by the coronavirus pandemic has accelerated work in this area, Mester detailed:

“The legislation proposed that every American should have an account at the Fed in which digital dollars could be deposited, as liabilities of the Federal Reserve, which could be used for emergency payments.”

She added that “other proposals would create a new payment instrument, digital currency, which would be exactly like the physical currency issued by central banks today, but in digital form and, potentially, without the anonymity of physical currency.”

Mester explained that some designs of the digital dollar allow the central bank to issue the CBDC directly into end-user portfolios using services facilitated by the central bank, without the involvement of commercial banks.

She further confirmed that “the Federal Reserve has been studying the issues raised by central bank digital currency for some time,” noting that various Federal Reserve banks are part of initiatives to explore the use of digital central bank currency.

The Federal Reserve Board has a technology lab called Techlab that has created platforms and tested a range of technologies relevant to digital currency and other payment innovations. Staff members from several Federal Reserve banks, including software developers, contribute to this effort.

“Given the significant role of the dollar, it is essential that the Federal Reserve remain at the forefront of research and policy development regarding central bank digital currencies,” Federal Reserve Governor Lael Brainard previously commented.

Regarding individual Federal Reserve banks, Mester noted that the Federal Reserve Bank of Boston is working with the Massachusetts Institute of Technology (MIT) to experiment with existing and new technologies that could be used for a digital dollar. This multi-year initiative was launched in August.

The Federal Reserve Bank of New York created an innovation center in partnership with the Bank for International Settlements (BIS) to identify critical trends and financial technology relevant to central banks.

Mester also stressed the need to assess the potential risks, costs, benefits and policy issues associated with a digital dollar, such as “financial stability, market structure, security, privacy and monetary policy. She stressed that the demand for and uses of a CBDC must be assessed to determine “whether such a central bank digital currency would allow for faster and more ubiquitous payments in emergencies and more generally”.

In the meantime, a number of central banks around the world have stepped up their research on CBDCs in response to Libra, a cryptocurrency proposed by social media giant Facebook, and the next Chinese digital currency that is already being tested in several major cities, including Beijing and Hong Kong.