The first heavyweight paper weighing the pros and cons of a digital currency is doing the rounds after release by the US Federal Reserve
Numerous nations, notably the United Kingdom, are toying with the notion of creating a central bank digital currency (CBDC), but have not progressed beyond the research stage. The Fed does not endorse a CDBC strategy, but invites stakeholders and the general public to share their perspectives on digitalization. A CDBC is the digital counterpart of cash in your pocket, but it is not a cryptocurrency since it is not linked to a blockchain. For example, a CBDC enables someone to spend or transfer money without the need of a bank account.
The 40-page document, billed as “the first step in a public conversation between the Federal Reserve and stakeholders concerning central bank digital currencies,” makes no definitive statements about a central bank digital currency, or CBDC. The study was initially scheduled for release in the summer of 2021 but was postponed.
“The paper is light on conclusions and reinforces our view that a Fed-backed CBDC is at best years away from launch,” Isaac Boltansky, director of policy research for brokerage BTIG, wrote in a note. “We are bearish on a legislative solution emerging.”
“I’m genuinely undecided whether there is a legitimate need for a CBDC,” Republican U.S. Senator Cynthia Lummis, a leading digital currency proponent, tweeted following the Fed’s report.
As lawmakers, regulators and the White House debate the issue, the private sector is likely to move ahead with products that may weaken the argument for a digital dollar, Ian Katz, managing director of Capital Alpha Partners, said in a note. “If it finally happens years down the road, a Fed CBDC would be less of a world-changer than it would be now,” he added.
Additionally, there are possible drawbacks: the government would need to handle market response to the US assuming a function historically performed by private banks. Additionally, it would need individuals to trust the government with all of their financial information, while the study suggests that this problem may be alleviated by enabling “intermediaries” to resolve privacy concerns “using current mechanisms.”