CBDC Digital Dollar Discussion Paper to be Released by Federal Reserve

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In Brief
  • Federal Reserve Chair Jerome Powell said the central bank will publish a digital dollar discussion paper in the summer.

  • The paper will address risks and benefits associated with a U.S. central bank digital currency.

  • Powell also acknowledged the advantages afforded by distributed ledger technology, while highlighting its risks.

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Federal Reserve Chair Jerome Powell said the central bank will publish a discussion paper on its potential central bank digital currency (CBDC) in the summer.

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The Fed chairman broached the subject in a public address posted on the website of the Federal Reserve. He first spoke about how the Fed had always adapted to new technologies to facilitate payments.

Here, Powell specifically addressed the advancement of digital ledger technologies, highlighting cryptocurrencies, stablecoins, and finally a CBDC. In light of the development of a prospective “digital dollar,” Powell stated that the Fed would issue a discussion paper about the subject during the summer.

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CBDC discussion paper

Powell said the paper would outline the central bank’s current perspective about digital payments. This would focus particularly on the benefits and risks of the CBDC in the context of the United States. To this end, Powell added that the central bank would solicit commentary for the public, “on issues related to payments, financial inclusion, data privacy, and information security.” 

The Fed chairman emphasized that this broader perspective would be necessary to determine how and whether the institution should move forward with the project. He added that it would be “the beginning of what will be a thoughtful and deliberative process.” Powell concluded that regardless of the outcome, the Fed intends to play a leading role in the development of international standards for CBDCs.

Before addressing the paper, Powell made several remarks describing CBDCs, “A CBDC is a new type of central bank liability issued in digital form,” he explained. Although it could vary in its structure and technology, he said it could potentially be used by the public. Powell highlighted that the Fed had been researching and experimenting with CBDCs for years, to understand potential benefits and risks. 

The primary focus, he said, would be how a CBDC could improve on a payments system already proven safe and effective. He emphasized that any potential CBDC would complement already existing digital forms of cash, not replace them.

Stablecoin perspective

Although slow and deliberate on issuing its own digital currency, the Fed chairman demonstrated the institution has thoroughly appraised cryptocurrencies. Powell acknowledged a list of features enabled by distributed ledger technology. Among them are a new approach to recording asset ownership and the creation of new financial products and services.

Highlighting cryptocurrencies as one of these new products, Powell added that they are not a convenient way to make payments. This is largely due to their volatility, he noted. However, he exempted stablecoins, due to their being tied to the value of a currency.

Powell acknowledged their “potential to enhance payments efficiency, speed up settlement flows, and reduce end-user costs.” Despite this, they still lack appropriate protection, he added. The ability to utilize these advantages, while providing proper protection, is the impetus for producing a CBDC. 

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Nick is a data scientist who teaches economics and communication in Budapest, Hungary, where he received a BA in Political Science and Economics and an MSc in Business Analytics from CEU. He has been writing about cryptocurrency and blockchain technology since 2018, and is intrigued by its potential economic and political usage. He can best be described as an optimistic center-left skeptic.

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