On November 19, Federal Reserve chairman Jerome Powell responded to questions regarding central bank digital currency (CBDC) prospects in an official letter to Congress representatives French Hill and Bill Foster, highlighting that the benefits of issuing CBDC remain unclear.
Jerome Powell shared that, while the Federal Reserve is not yet planning to issue a digital dollar, the authority continues to evaluate the potential costs and benefits by monitoring actions of other countries’ authorities, examining private companies’ offerings, like the Facebook-led Libra, and by conducting their own research with “small-scale experiments”.
For Powell, “it is not yet clear what additional value a general purpose CBDC” could provide to the country, or whether it could lead to a safer, cheaper, more efficient payment system. In his observation, many problems that other countries are trying to solve with the introduction of a CBDC, such as declining use of cash, lack of competition in the banking sector, high percentage of unbanked population, or “poorly developed infrastructure,” simply do not apply to the US financial system.
While benefits remain unclear for the Federal Reserve chairman, risks and operational challenges are plenty. First of all, in his view, a CBDC issuance could destabilize the financial system by damaging private banking sector. That could lead to bank runs where customers try to withdraw more money than banks can provide, and reduction of competition in the banking sector.
Powell also pointed out the operational challenges needed to achieve a high level of cybersecurity, reliability, integrity and scalability of the blockchain-based digital currency system. Furthermore, he detailed that transparency and a financial crime prevention mechanism would require massive data collection, further causing data privacy and security issues. Not to mention, the numerous policies that would be required to determine the legal status of digital currency.
In the meantime, as COIN360 reported in October, former Trump campaign advisor and former pick for the Federal Reserve Stephen Moore announced plans to issue a stablecoin Frax, which is planned to be backed by a fractional reserve of US dollars.