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- Fed has been focused on exploring whether and how a CBDC could improve on an already safe, effective, dynamic, and efficient U.S. domestic payments system.
- If the U.S. does introduce a CDBC, it’ll serve as a complement to and not a replacement of the fiat dollar.
- This summer, the Fed will issue a discussion paper, stimulating broad conversation, to help gain a deeper insight before making any decisions.
The United States Federal Reserve (Fed) is exploring creating a “digital dollar,” a central bank-controlled cryptocurrency, unveiled Fed Chair Jerome Powell. Announced recently, the U.S. Fed has joined ranks with the numerous nations contemplating the launch of a digital version of their own traditional (fiat) currencies, or Central Bank Digital Currencies (CBDCs).
U.S. Explores Potential CDBC
Released Thursday, Powell’s rare video statement on the Fed’s website revealed that they have been exploring the potential benefits and pitfalls of a CBDC for several years. Especially “whether and how a CBDC could improve on an already safe, effective, dynamic, and efficient U.S. domestic payments system.” Powell was quick to clarify that “if” the U.S. does introduce a CDBC, it’ll serve as “a complement to” and “not a replacement of” the fiat dollar, and that’ll take time, as it requires a careful analysis and well-prepared roadmap.
Digital currencies are categorized into three categories:
- Bitcoin & Altcoins:
Bitcoin was the first cryptocurrency, followed shortly by other alternatives, termed Altcoins. Inspired by bitcoin’s blockchain ledger technology, these coins keep finding new and more efficient use cases of the tech, like faster and cheaper transactions and smart contracts.
- Stablecoins:
The altcoins pegged to a stable asset (like the U.S. dollar or gold) are called stablecoins. They offer the fast processing, security, and decentralized benefits of cryptocurrency at reduced risks of volatility.
- CBDCs:
These are the blockchain ledger-based centralized or government-issued coins. Unlike other decentralized and independent cryptocurrencies, CDBCs are controlled by central banks or national governments.
Discussion Paper Issuance This Summer
As reported earlier, the Federal Reserve Board is set to issue a discussion paper “to stimulate broad conversation” this summer, seeking information and public input on “payments, financial inclusion, data privacy, and information security” related issues. According to Powell, the Fed aspires to play “a leading role” in the evolution of international standards for CBDCs.
Several nations are in the process of developing CDBCs, but it has yet to be launched.
- China:
The first national government to consider a CDBC and has been working on the project since 2014. Currently, it is piloting a digital yuan in 10 cities.
- Sweden:
While the testing began last year, it recently launched a pilot CBDC called the e-krona.
- Europe:
The European Union is exploring a digital euro.
- United Kingdom:
The U.K. has appointed a task force to explore and weigh the pros and cons of a digital pound.
- Bahamas:
The Bahamas are piloting a Sand Dollar.
CDBC: Unlike Ordinary Cryptocurrencies
CDBCs differ from ordinary cryptocurrencies, the most notable difference being their centralized nature. The cryptocurrency was devised to function as a monetary system independent of any central authority or control, and that idea doesn’t sit well with national governments that operate by retaining control over payment systems.
Utmost Attention To Regulations
Powell noted several aspects of cryptocurrency, including the need for increased regulation. Switching to stablecoin, he warned that while it may enhance efficiency and reduce costs, it still carries potential risks and can’t be as secure as one’s bank-deposited money. He said the utmost attention must be paid “to the appropriate regulatory and oversight framework.” After all, only a better and stronger regulation can help curb the setbacks of cryptocurrency, such as fraud and money laundering, without compromising the development of blockchain technology.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while pursuing his post-graduation major in blockchain development. He is a keen observer of details and shares his passion for writing, along with coding. His backend knowledge about blockchain helps him give a unique perspective to his writing skills, and a reliable craft at explaining the concepts such as blockchain programming, languages and token minting. He also frequently shares technical details and performance indicators of ICOs and IDOs.
