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Federal Reserve to Research Hypothetical Digital Currency

Categories : Cash has legal tender status, Cash is a symbol of national sovereignty
August 18, 2020
Tags : Cash, Central Bank, Central Bank Digital Currency, US
The Federal Reserve highlighted the research and experimentation undertaken in partnership with the MIT to enhance its understanding of the opportunities and risks associated with central bank digital currencies.
Guillaume Lepecq

Chair, CashEssentials

This post is also available in: Spanish

Digital Currency as a Complement to Cash

“Given the dollar’s important role, it is essential that the Federal Reserve remain on the frontier of research and policy development regarding central bank digital currencies,” said Federal Reserve Board Governor Lael Brainard. “Like other central banks, we are continuing to assess the opportunities and challenges of, as well as the use cases for, a digital currency, as a complement to cash and other payments options.”

Technological innovations inspire new ways to think about money. Consistent with its role in promoting a safe, accessible, and efficient U.S. payment system, the Federal Reserve is engaged in ongoing research and experimentation with the latest payment technologies. The Federal Reserve Board’s Technology Lab (TechLab) is expanding experimentation with technologies relevant to digital currencies and other payment innovations. The TechLab conducts hands-on research to further the Federal Reserve’s understanding of payment technologies and support development of policy views. The TechLab is a multidisciplinary team composed of Board and Federal Reserve Bank staff with expertise in payments, economics, law, information technology, and computer science.

In addition, the Federal Reserve Bank of Boston is collaborating with researchers at the Massachusetts Institute of Technology on a multiyear effort to build a hypothetical digital currency oriented for central bank use. This research project is intended to support the Board’s broader efforts in assessing the safety and efficiency of central bank digital currency systems. The project focuses solely on developing an understanding of the capacities and limitations of the relevant technologies, rather than serving as a prototype for a Federal Reserve issued digital currency or addressing the wide-ranging policy issues associated with its potential issuance.

A Sovereign Currency as the Anchor of the Nation’s Payment Systems

“The introduction of Bitcoin and the subsequent emergence of stablecoins with potentially global reach, such as Facebook’s Libra, have raised fundamental questions about legal and regulatory safeguards, financial stability, and the role of currency in society. This prospect has intensified calls for CBDCs to maintain the sovereign currency as the anchor of the nation’s payment systems. Moreover, China has moved ahead rapidly on its version of a CBDC.” said Governor Brainard in a speech delivered by webcast at the Federal Reserve Board. “Lessons from this collaboration will be published, and any codebase that is developed through this effort will be offered as open-source software for anyone to use for experimentation.”

No Decision on the Legality and Feasibility

According to Bloomberg, Brainard cautioned that the Fed “has not made a decision whether to undertake” a significant policy process that explores the legality and feasibility of digital currency with the government and stakeholders.

According to a survey published in January by the Bank for International Settlements (BIS), 80% of central banks are engaging in some kind of work in relation to CBDC. However, only 40% have evolved from research to experiments or proofs-of-concept and less than 10% are running pilots, all of which come from emerging markets. These numbers have actually declined between 2018 and 2019, as illustrated by the charts below.

This post is also available in: Spanish