How a new digital dollar could shake up the US financial system

The Federal Reserve says it has not decided whether or not to pursue a digital currency, but notes that a CBDC “could provide households and businesses with a convenient electronic form of central bank money, with the security and liquidity what it would entail; give entrepreneurs a platform on which to create new financial products and services; support faster and cheaper payments (including cross-border payments); and expanding consumer access to the financial system.

“The Federal Reserve does not intend to proceed with issuing a CBDC without clear support from the executive branch and Congress, ideally in the form of specific enabling legislation,” the statement also said. Federal Reserve.

A US CBDC would not replace cash or paper money. “The Federal Reserve is committed to the continued safety and availability of liquidity and envisions a CBDC as a means to expand safe payment options, not reduce or replace them,” the Federal Reserve said. .

Senior Biden administration officials told reporters that “the implications of the potential issuance of a digital dollar are profound.” But these officials added that they intended to “maintain the centrality of the dollar in global financial markets and in the global economy.”

Digital currency can be a surveillance tool

Digital currency issued by a central bank can be used as a tool for government surveillance of citizens and control over their financial transactions. This has been a concern with China’s digital currency, which is in the preliminary steps of deployment. As Akram KeramChina specialist at the National Endowment for Democracy, written last year“With the digital yuan, the CCP [Chinese Communist Party] will have direct control and access to the financial life of individuals, without the need to force intermediary financial entities. In a society dominated by the digital yuan, the government could easily suspend the digital wallets of dissidents and human rights activists, for example.

The Federal Reserve said any digital currency issued in the United States “should strike an appropriate balance between protecting consumers’ privacy rights and providing the necessary transparency to deter criminal activity.” This could be accomplished with an intermediate model in which “the private sector would offer digital accounts or wallets to facilitate the management of CBDC assets and payments”, thus “facilitat[ing] using existing private sector privacy and identity management frameworks,” the Federal Reserve said.

The Federal Reserve provided more information about a potential digital currency in a report published in January 2022.

Biden seeks analysis

The Biden-commissioned report is to be produced by the Secretary of the Treasury, in consultation with the Secretary of State, Attorney General, Secretary of Commerce, Secretary of Homeland Security, Director of the Office of Management and Budget and the director of national intelligence.

The report is supposed to analyze the potential implications of a digital currency on economic growth, stability and “financial inclusion”; the relationship between a digital currency issued in the United States and digital assets administered by the private sector; “the future of sovereign and private money globally and the implications for our financial system and our democracy”; “the extent to which foreign CBDCs could displace existing currencies and alter the payment system in ways that could undermine US financial centrality”; potential implications for national security, financial crime and human rights; and the effects that foreign CBDCs may have on U.S. interests generally.

The executive order encourages the Federal Reserve to “evaluate the optimal form of a CBDC in the United States” and develop a strategic plan “that assesses the steps and requirements necessary for the potential implementation and launch of a CBDC in the United States.” United States”. Biden also wants the Federal Reserve to assess how a CBDC “could enhance or impede the ability of monetary policy to operate effectively as a critical macroeconomic stabilization tool.” Biden further asked federal agencies to assess whether Congress should make any legislative changes before the United States can issue a digital currency.

This story originally appeared on Ars-Technica.

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Don F. Davis