The Fed explores the possibility of launching a digital currency

The Fed explores the possibility of launching a digital currency - 190719 image federal reserve 1024x684The Federal Reserve is exploring the creation of a digital US dollar. The move could shake up the banking system by giving many low-income workers access to a financial system that they otherwise would not have.

Many advantages theoretically, but also disadvantages

President Jerome Powell, citing advances in payment technology, said the Fed has "closely monitored and adapted" to such innovations.

"The effective functioning of our economy requires that people have faith and trust not only in the dollar, but also in payment networks, banks and other payment service providers that allow for the flow of money on a daily basis," he said. Powell stated in a video. 

“Our goal is to ensure a secure and efficient payment system that offers broad benefits to American households and businesses while embracing innovation,” he said.

"The United States shouldn't implement a [central bank digital currency] simply because we can or because others are doing it," the American Bankers Association said. The group added that while the benefits "are theoretical, difficult to measure and can be elusive", the negative consequences "could be severe".

In recent years, the meteoric rise of cryptocurrencies has sparked conversations in the Fed to provide a digital version of the dollar to use alongside traditional paper currency. One of the biggest drivers of the idea was a Facebook-led effort in 2019 to enable the use of the global payments network using cryptographic technology. 

While the action did not violate the scope of widespread use, it provided an example of how the private sector could create a currency system outside the control of the government.

The banks are thinking about it seriously

So now, a few years later, central banks around the world have begun to explore the idea of ​​issuing their own digital currency which would function in the same authority as their physical counterpart while offering some of the benefits of other cryptocurrencies.

This, however, could provide unwelcome competition to banks, giving depositors the ability to keep their money in more places. In theory, a person or company could keep their digital dollars in a virtual "wallet" and then transfer them directly to someone else without using a bank account. But unlike decentralized currencies like Bitcoin and Ether, the money would be backed and controlled by a central bank, where monetary authorities could use their digital liquidity to guide policy decisions regarding interest rates.

Next month, the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology's Digital Currency Initiative will aim to publish the first results of their work to see if a digital currency could work in practice.

But ultimately, the decision will be left to Congress to see if the central bank should pursue such a measure. Lawmakers on both sides seem interested in the idea, as they keep an eye on China in its efforts to develop its own central bank digital currency and another on the rise of other cryptocurrencies that could decrease the dollar.