US Fed Releases Whitepaper On Digital Dollar• January 21, 2022 2:36 pm • Comments
The United States Central Bank, commonly known as the Federal Reserve, has recently announced the release of a new whitepaper that discusses the pros and cons of launching a central bank digital currency (CDBC).
The whitepaper, however, does not conclude with whether the Federal Reserve was actually going to launch a digital dollar which left some readers confused.
They also clarified that if they did move ahead with the launch of a CBDC, they would need the support of both Congress and the president.
The whitepaper goes into detail about functions and utilities that a CDBC would have particularly for the United States economy.
This is huge! Everyone should give this paper by The Federal Reserve on CDBC a read! https://t.co/69ZjDKoTlC
— rekhi.eth (@rakshitrekhi) January 20, 2022
The whitepaper pointed out that the CBDC would function differently from traditional digital payments. Instead of traditional banks, the Digital Dollar will function as a digital token with a direct claim from the central bank.
In this way, it almost functions similarly to physical cash.
Additionally, a central bank backed currency would also be different from usual cryptocurrencies that are issued by private actors and therefore carry higher risk potential.
‘While a CBDC could provide a safe, digital payment option for households and businesses as the payments system continues to evolve, and may result in faster payment options between countries, there may also be downsides.
Challenges include maintaining financial stability and making sure the digital dollar would ‘complement existing means of payment’.
This whitepaper has long been awaited by the general public for a long time as other countries have already started experimenting with CBDCs.
The Fed states that the key differences when using the digital dollar is that transactions in the traditional fiat dollar were all liabilities of private entities such as commercial banks.
A move to a digital dollar would move all the liabilities to the central bank like the Federal Reserve.
There were also multiple downsides to consider.
Essentially, it would be more complex and difficult for the government to preserve financial stability due to less control of a digital form of a dollar and these would be a lot of work to do to figure out how it would complement the current system for financial transactions.
Concerns of privacy and preventing illegal activity were also other topics brought up in the discussion.
With that being said, the Fed still sees this option as a less risky alternative compared to other cryptocurrencies and stable coins.
The Fed has not committed on how such a currency could be issued, whether it would use the same blockchain that underpins other digital tokens like Bitcoin (BTC-USD) and Ether (ETH-USD).
It could have a ledger, or would it function like a physical dollar, which has no ledger. Also, it was unclear how CBDC bank accounts would work, given that the Fed doesn’t house personal bank accounts.
The central bank has solicited public comments on the paper, a period that will last 120 days, and is asking for input on numerous questions.
These include whether a CBDC should pay interest, or whether it should limit quantities held by individual users. Officials are also asking what types of firms should be middlemen for a CBDC, and what that structure could look like.
In any case, it sounds like the launch of a CBDC in the future seems quite possible, but the project is still very early in the stages.
Therefore, the crypto and blockchain community should not get excited yet as many plans can change in the next few years, but should keep in mind that this might be something that will happen one day.
The Federal Reserve would be publishing a discussion paper that would focus on the possible creation of a central digital bank currency (CDBC) this summer of 2021 ☀️
— coinpass.com (@coinpassglobal) May 21, 2021
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