The Federal Reserve is taking the next step in weighing whether to launch a U.S. digital currency, issuing a report Thursday that explores the potential benefits and drawbacks of such a move without indicating where it will land.
“We look forward to engaging with the public, elected representatives, and a broad range of stakeholders as we examine the positives and negatives of a central bank digital currency in the United States,” Federal Reserve Chair Jerome H. Powell said in a statement accompanying the report.
Top Fed officials themselves so far have appeared divided on the matter. Powell last year said the project would need to demonstrate “clear and tangible benefits that outweigh any costs and risks.”
Lael Brainard, a member of the central bank’s Board of Governors who was recently nominated by President Biden to become the Fed’s No. 2 official, has signaled more interest. She has framed the issue both as a competitive imperative for the U.S. internationally — China adopted its own central bank digital currency last year — and an opportunity to extend benefits to lower-income Americans who struggle to access the financial system.
Other liberal advocates of a digital dollar have focused on its potential to get cash quickly to Americans in financial straits who lack bank accounts, a need highlighted by the challenge the federal government faced distributing relief money during the pandemic.
The specter that a government-issued digital dollar would open the door to the Fed offering banking services to consumers has drawn objections from the banking industry. Commercial banks have raised alarms that the move could drain their deposits and destabilize financial markets. And while the Fed, in the Thursday paper, avoids firm conclusions about how it would proceed, it suggested it does not favor offering accounts directly to consumers.
“Such accounts would represent a significant expansion of the Federal Reserve’s role in the financial system and the economy,” according to the report. Instead, the central bank indicated it would favor letting private companies offer digital wallets that would let consumers hold and spend the currency.
The report comes amid an explosion in the market for stablecoins, cryptocurrencies whose prices are pegged to an external asset such as the dollar. The private companies issuing those tokens market them as a safer alternative to other, better-known cryptocurrencies, such as Bitcoin and Ether, that have experienced wild price gyrations. At the moment, stablecoins are primarily used by investors to facilitate trades among different crypto assets. But their backers argue they hold the potential to become a widely adopted means of payment.
But top regulators say stablecoin issuers lack adequate controls on the size and quality of their reserve holdings, inviting the risk of a sort of bank run if there’s a sudden demand for redemptions. A group of regulators led by the Treasury Department in November called for imposing bank-like rules on stablecoin companies.
Powell has said a U.S. digital currency and stablecoins can coexist. The Fed’s report said a U.S. digital currency could “spur innovation by banks and other actors and would be a safer deposit substitute than many other products, including stablecoins and other types of nonbank money.”
The central bank also noted that it would not expect a Fed-backed digital currency to replace physical cash. “The Federal Reserve is committed to ensuring the continued safety and availability of cash,” the report said, adding the bank would view a digital currency “as a means to expand safe payment options, not to reduce or replace them.”