News: The Fed Considers a National Cryptocurrency

While cryptocurrencies, like Bitcoin and Ethereum, continue to be popular options for investors willing to take a big risk for an equally significant reward, they remain a no-no for the federal government due to their lack of regulations.

However, the federal government has seen the desire and need for a stable “digital dollar” and has been talking through the potential release of a central bank-issued digital currency. This would be effectively a federally regulated cryptocurrency. 

There are plenty of folks in the federal government on every side of the conversation — proponents, opponents and undecided — but here’s the latest on the potential digitization of the U.S. dollar.  

What is central bank digital currency?

Like Bitcoin and other cryptocurrencies, central bank digital currency (CBDC) is a prospective digital token with a financial value attached to it. 

Unlike Bitcoin, which is a true cryptocurrency with nothing backing it, CBDC would be a stablecoin. A stablecoin is a digital currency backed by something of value, such as a fiat currency or a less volatile asset. In the case of CBDC, it would be a digital form of today’s dollar and would trade on a 1-to-1 ratio with the U.S. dollar. 

CBDC would be issued and regulated directly by the central bank to ensure its value remains consistent.

Currently, there are only two forms of central bank money: cash and reserves at eligible financial institutions. If it’s approved, CBDC would be the third form.

Why does the federal government want in on cryptocurrency?

Unlike El Salvador, which has embraced Bitcoin as a national currency, the U.S. has been reluctant to accept crypto as a legitimate legal currency. So, why is it looking into CBDC, which is effectively a national cryptocurrency?

CBDC supporters argue it’s a low-cost way to pay for goods and services, as well as transfer money. This is especially true for the 5.4% of Americans who lack traditional bank accounts. 

They also argue that it would allow the federal government to bypass the banking system altogether when needed. For example, the circulation of stimulus payments, like we saw several times during the COVID-19 pandemic, could happen digitally. 

Instead of using banking information from the previous tax year, which may be outdated, the federal government could deposit CBDC directly into the recipient’s digital wallet. The same could occur for welfare, unemployment and Social Security payments.   

Why are some pushing back against CBDC?

While there is some support in the federal government for CBDC, there is plenty of opposition too. Fed Governor Christopher Waller and Fed Vice Chairman of Supervision Randal Quarles have openly gone against CBDC. 

Waller pointed toward the obvious cybersecurity risks associated with a digital currency, and he has a valid point. Recently, we’ve seen hackers have stolen as much as $610 million in cryptocurrency through various online exchanges. 

Granted, if CBDC became a legal tender, the FDIC would insure it against any theft — digital theft included — but the cost could be significant. 

Weller also pointed toward private stablecoin as an alternative to the federal option. However, he noted private stablecoins would still require additional regulations to ensure they honor the 1-to-1 exchange ratio. 

Will we ever see CBDC?

According to Bank of America, it’s not a matter of if we’ll see CBDC, but when. What remains to be determined is whether it’s at the federal level or if it ends up being a heavier-regulated, privately owned stablecoin.