Fed Exploring ‘Hypothetical’ Digital Currency

Digital dollars on the horizon? Maybe – but first comes a focus on policy.

A week after details of the Federal Reserve’s instant payment initiative emerged, news came via Bloomberg that the central bank is working with the Massachusetts Institute of Technology (MIT) to explore the possibility of issuing digital currency.

In a speech delivered by webcast at the Federal Reserve Board and Federal Reserve Bank of San Francisco’s Innovation Office Hours, Fed Governor Lael Brainard said that the Federal Reserve Bank of Boston is working with researchers at MIT to “build and test a hypothetical digital currency oriented to central bank uses.”

She said that lessons stemming from the collaboration will be published, adding that any codebase developed through the collaboration will be made available as open-source software “for anyone to use for experimentation.”

The goal, according to Brainard, is to assess potential risks associated with a proposed digital currency (also known as a central bank digital currency or CBDC) and its possible impact within payments.

“Separately, a significant policy process would be required to consider the issuance of a CBDC, along with extensive deliberations and engagement with other parts of the federal government and a broad set of other stakeholders,” Brainard said in the speech. She added that such a separate policy process has not yet been put into place.

Legal issues include whether a CBDC would have status as legal tender. Collaboration with, and learning from, other central banks on CBDC will be beneficial, said Brainard.

Back in May, 80 percent of 66 central banks queried by the Bank of International Settlements (BIS) said they were working on CBDCs. Notably, China – through the efforts of its central bank – has been developing and testing the rollout of a national digital currency.

And even before the BIS findings, in March, members of U.S. Congress called for the creation of a digital currency that would be “a balance expressed as a dollar value consisting of digital ledger entries that are recorded as liabilities in the accounts of any Federal Reserve bank; or an electronic unit of value, redeemable by an eligible financial institution (as determined by the Board of Governors of the Federal Reserve System).”

More recently, “since financial and payments systems share extensive cross-border linkages, a poorly designed CBDC issued in one jurisdiction could create financial stability issues in another jurisdiction,” Brainard said at the Thursday event.

Speed – and especially rapid settlement of transactions – has been a key focus of the Fed and other financial stakeholders in the wake of the pandemic.

That’s due in part to the slow progress in getting stimulus payments to recipients over the past several months – through paper checks, for instance, or debit cards.  As reported by PYMNTS, last week’s disclosures on FedNow said that, with a 2023-2024 rollout, instant payments infrastructure would provide real-time settlement and clearing functions with a focus on digital payments.

Bloomberg reported that James Cunha, the senior vice president at the Boston Fed overseeing digital dollar initiatives, has said the efforts between the Fed and MIT will look to build the engine and software needed to underpin digital currency issuance. Cunha, according to Bloomberg, has said technologists are “agnostic” on whether CBDC is intermediated through banks, which ultimately would be determined by policy.

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