Fed to Release Paper Exploring Launch of Digital Dollar
The Federal Reserve is poised this week to release a paper soliciting public comment about central bank digital currencies (CBDCs), according to a report in The Wall Street Journal.The paper was scheduled to be released earlier in the summer but was delayed. It represents the central bank's first concrete step forward in exploring the use of digital currencies in the U.S. economy and could pave the way for a Fed-backed digital dollar.
The Federal Reserve joins a growing list of central banks around the world that are discussing the utility of a central bank-issued digital currency in their respective country's economies. For example, Sweden's Rijksbank has already issued several papers exploring its use, while China's central bank is conducting pilot tests for its digital currency DC/EP.
But the Fed's task is fraught with national and international implications. For example, the absence of a digital equivalent to the dollar — with fast processing and settlement times for trades across borders — could upend the currency's dominant status as a reserve currency and make other digital currencies, such as China’s digital yuan, more attractive. The dollar accounted for 59% of global currency reserves in May 2021, according to data from the International Monetary Fund (IMF).
The consequences to domestic economic policy are also complex. A digital dollar would ease monetary policy implementation by removing intermediaries and establishing a direct connection between the Fed and citizens. However, the currency could curtail privacy and enable governing authorities to monitor and manipulate transactions occurring in their network. It could stymie the development of an emerging stablecoin ecosystem that could potentially displace
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