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This month, the Board of Governors of the Federal Reserve System Release of the much-anticipated report Questions about the possible use and adoption of digital currencies by countries in their financial systems. The title of the document is “Currency and Payments: The Dollar in the Age of Digital Transformation,” and as the name suggests, the document is transformative.
boot… is the monthly opinion column for Marc Powers, who spent most of his 40-year legal career handling complex securities-related cases in the United States following his tenure with the SEC. He is now an adjunct professor at Florida International University School of Law, where he teaches a course on “Blockchain, Cryptography, and Regulatory Considerations.”
For the regulars on this column, I Top 5 events in blockchain identified 2021. One of them was Fed Chairman Jerome Powell’s comments on his openness to digital assets and the possible coexistence of the Fed’s legacy monetary and financial system and cryptocurrencies. He said in public hearings that there is no need to ban cryptocurrencies at this time, and that he sees value in stablecoins if properly regulated.
I also argue in that column that the Federal Reserve appears to be on the verge of approving and issuing a central bank digital currency. Well, that’s exactly what the report says, despite the typical disclaimer and Washington’s two-pronged hedge. Given the importance of the United States creating and adopting its own CBDC, this paper deserves to be highlighted.
The Federal Reserve System and CBDC
Before getting into the content of the paper, let’s see how the Fed self-identity:
“The Federal Reserve System is the central bank of the United States.It performs five general functions to promote the efficient functioning of the U.S. economy and, more generally, to advance the public interest. “
The five functions are: 1) implement national monetary policy, 2) promote the stability of the financial system, 3) promote the safety and soundness of individual financial institutions, 4) promote the safety and efficiency of payment and settlement systems, and 5) promote consumer conservation and community development.
The document is intended to be the “first step” in public discussions between the Fed and stakeholders about a CBDC, which it defines as “the digital responsibility of a central bank widely used by the public.” The document warns that it is “not designed to advance any specific policy outcome,” but the publication of the document itself does so. In most cases, simply asking a question can increase awareness and acceptance of the topic.
The document identifies three forms of money: central bank money, commercial bank money, and non-bank money. Federal money has no credit and liquidity risk, bank money has some risk, and non-bank money has the greatest risk because it is not subject to strict rules and regulations and cannot provide deposit insurance for the Federal Deposit Insurance Corporation. Related companies such as PayPal use various technologies, such as mobile apps, to transfer balances on their books.
Central bank money is a liability of the central bank, often referred to as “fiat” or “sovereign” money, that can exist in physical form, like paper money, or as a digital balance held by commercial banks at the Federal Reserve. Bank currency is generally a deposit commonly used by the public and can be in digital form. Despite improvements to traditional or legacy financial systems in recent years — such as a digital real-time payments network and a FedNow service scheduled to launch in 2023 — the paper acknowledges that challenges remain. One is the cross-border payment field, which currently has slow settlement times, high fees and limited accessibility.
Another challenge is that by 2022, a large number of Americans will still be without access to digital banking and payment services. More than 5 percent of American households, or more than 7 million Americans, are still unbanked, although this percentage has fallen from 8.2 percent over the past decade.
Some of the explanations given by the unbanked include their lack of sufficient funds to meet the minimum deposit requirements to open a traditional bank account, a lack of trust in banks, privacy concerns or bank fees that are too high. All of these seem strikingly similar to the reasons given by Satoshi Nakamoto for creating the Bitcoin blockchain in October 2008. The Fed document also noted that another 20% of households have bank accounts but rely on more costly financial services, such as check cashing services, payday loans and money orders. In total there are a staggering 35 million Americans who are unbanked or underbanked!
Given these challenges, this article discusses the recent use of digital assets with similar monetary characteristics, such as cryptocurrencies and stablecoins.Notably, it cites the President’s Financial Markets Task Force’s Report published last November, which states that “when properly designed and regulated, stablecoins can support faster, more efficient, and more inclusive payment options.” cough cough. This is something private businesses and cryptocurrency traders have probably known for five years! But the good news is that our government officials are realizing the benefits, at least now.
The paper concludes with an exposition of how a CBDC fits into the U.S. currency and payments landscape. It sets out design requirements to protect privacy, the way a CBDC could interfere with the traditional methods the Federal Reserve uses to regulate the U.S. economy, needs to be accepted and widely transferred by various intermediaries and clients, and needs to be able to identify and combat money laundering and terrorist financing. To me, some of the most revealing sentences in the paper show Powell’s hands, including the discussion in the “Potential Benefits of CBDC” section.
— “CBDC has the potential to become a new foundation for payment systems and a bridge between different payment services, both traditional and new.” This is the international regulatory think tank Global Digital Finance in its paper “The Era of Public Digital Currencies: A Guide to Issuance” The content written, I am the contributing author.
— “A U.S. CBDC will provide the public with broad access to digital currencies that are immune to credit and liquidity risks.”
— “Another potential benefit of a U.S.-issued CBDC could be maintaining the dollar’s international dominance.” This is a Topics and concerns I write about Around February 2021.
— “Some have suggested that a CBDC could reduce common barriers to financial inclusion and could reduce transaction costs, which could be especially helpful for low-income households. This is certainly a worthwhile benefit, and I can see a Biden administration wanting and falling behind .
The last notable fact in the paper is the reduction in cash and paper money. Cash usage has fallen from over 40% in 2012 to 19% in 2020. Given all of this, it will be interesting to see and hear more about this from the Fed and other government agencies and officials in the coming months.
Mark Powers Currently an adjunct professor at Florida International University School of Law, teaching “Blockchain, Crypto and Regulatory Considerations” and “FinTech Law.” He recently retired from an Am Law 100 law firm where he established the National Securities Litigation and Regulatory Enforcement practice and the hedge fund industry practice. Marc began his legal career with SEC law enforcement. During his 40-year legal career, he has been involved in litigation including the Bernie Madoff Ponzi scheme, the most recent presidential pardon and the Martha Stewart insider trading trial.
The views expressed are those of the author alone and do not necessarily reflect the views of Cointelegraph or the Florida International University School of Law or its affiliates. This article is for general informational purposes only and is not intended and should not be considered legal or investment advice.
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