Federal Reserve Report on Digital Currency Centers on Banks

WASHINGTON (AP) — The Federal Reserve on Thursday released a much-anticipated report on central bank digital currencies that suggests it’s leaning toward having banks and other financial firms, rather than the Fed itself, manage central bank digital accounts. clients.

A central bank digital currency would differ in some ways from the online and digital payments that millions of Americans already make. These transactions are routed through banks, which would not be necessary with a digital dollar.

The Fed document, while emphasizing that no final decision on a digital currency has been made, said it would likely follow a “middle-range model” in which banks or payment companies create accounts or digital wallets. An alternative system would be for the Fed to issue digital dollars directly to consumers. But as the newspaper notes, the Fed is not allowed by law to create individual accounts.

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In releasing its study, the Fed characterized its likely introduction of a digital currency as a far-reaching step that would require broad acceptance in the financial world.

“The introduction of a (central bank digital currency) would represent a very significant innovation in U.S. currency,” the Fed study said. “Broad consultation with the general public and key stakeholders is essential.”

The Fed document comes as digital currency proliferates in various forms. Millions of people own cryptocurrencies, although they are often used more as investments than means of payment. But so-called stablecoins, which are often pegged to the dollar, have also boomed over the past year, mostly for cryptocurrency transactions.

And most central banks around the world are looking at government-backed digital currencies. China’s central bank has already tested a digital version of the yuan. Some Caribbean countries have already issued digital currencies.

A digital dollar could bring a host of benefits as well as risks. It would be a safer form of digital payment because the Fed, unlike a bank or stablecoin companies, cannot go bankrupt. It might be easier and cheaper to access for people without a bank account.

At the same time, a digital currency could pose privacy risks because it would be issued by the government. The Fed document, however, suggests that banks and other third-party companies would protect Fed consumer data while enforcing existing rules against money laundering and other illicit activities.

Such a government-issued digital dollar could also have major implications for commercial banks, as many Americans might prefer to hold this currency in a “wallet” issued by a payment provider like PayPal or Venmo, which could reduce deposits. banking. It would also compete with stablecoins and could reduce the cost of financial transactions, especially remittances abroad.

Still, the Fed is likely years away from issuing a digital currency, if it decides to do so. The document released Thursday begins a 120-day comment period, during which the Fed will seek public comment. Fed officials said the central bank has not made any decisions about a digital currency or how it will work. The Fed said it would only proceed if Congress specifically passes legislation authorizing a digital currency.

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