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Federal Reserve Considering Moving to a Digital Dollar

(Noted News) — Amid economic uncertainty caused by the coronavirus restrictions, Federal Reserve banks have been drawing the blueprints for central bank digital currencies (CBDC) and considering the possibility of a digital dollar. 

In September, Lorette Mester, CEO of the Federal Reserve Bank Of Cleveland, gave a speech at the Chicago Payments Symposium revealing that the Fed was exploring a system where every American would have a digital bank account that the Fed could deposit digital dollars into. 

Mester said that the research had been ongoing since before the COVID-19 pandemic, but that the crisis put much more of a focus on it. 

The Fed CEO went on to mention other ideas brewing within the Reserve Banks.

“Other proposals would create a new payments instrument, digital cash, which would be just like the physical currency issued by central banks today, but in a digital form and, potentially, without the anonymity of physical currency. Depending on how these currencies are designed, central banks could support them without the need for commercial bank involvement via direct issuance into the end-users’ digital wallets combined with central-bank-facilitated transfer and redemption services.”

Mester also said that the Fed’s Board of Governors has been using a laboratory to test out different ledger systems.

“The Board of Governors has a technology lab that has been building and testing a range of distributed ledger platforms to understand their potential benefits and tradeoffs. Staff members from several Reserve Banks, including Cleveland Fed software developers, are contributing to this effort.”

In plain English, the point of setting up Americans with a central bank digital currency account would be to provide a simple and centralized way to send, receive, spend, and hold money, instead of dealing with the web of different banking and money transfer apps.

To avoid completely displacing the banks, a system referred to as an “indirect CBDC” is being proposed; There are two different indirect CBDC systems, a “two-tiered CDBC” and a “synthetic CBDC.” 

In the two-tiered CBDC model, central banks would issue CBDC to regulated institutions which would then distribute it to the public, similar to what we have now; the vast majority of dollars in circulation are digital and are made available through the bank balances that everyone uses. 

The synthetic CBDC model (sCBDC) would entail licensed private entities issuing digital dollars backed by central bank reserves, almost like a prepaid credit card but with tokenized digital dollars.

The advent of the CBDC obviously echoes similar utility as cryptocurrency, which has been gaining rapid popularity over the years as investors look for an alternative to what they see as a debt-based global financial system which unfairly erodes money and purchasing power over time.

But a CBDC is not the same thing as a cryptocurrency, as a CBDC is created and centralized by a central bank, who has full control of its quantity and issuance. Bitcoin on the other hand is decentralized, controlled by no one, and has a hard cap on its supply.

Changpeng Zhao, the founder and CEO of Binance, the world’s largest cryptocurrency exchange in the world, says that a CBDC could threaten Bitcoin and its quest for mass adoption. 

“If there is a government pushing another cryptocurrency that’s even more open, more free, has less restrictions than Bitcoin, and is faster and cheaper to use, then that would threaten Bitcoin. But that is good for the industry, it’s just something better than Bitcoin, and would replace it.”

In Europe, the German central bank is exploring a “digital euro”. Burkhard Balz, a member of the executive board on Deutsche Bundesbank, said that though a digital euro has its benefits, it could threaten Europe’s sovereignty. 

“Therefore, a digital euro which could be transferred in real time between two devices—offline and embedded in smart contract environments—might be an option as an efficient and generally accepted means of payment supporting those innovative use cases.”

“Such developments would foster innovation, but could also threaten European financial, economic and, ultimately, political sovereignty—especially if those solutions come from outside of Europe, and become widely used for European retail payments.”

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