A Crypto US Dollar Could Boost the Global Reserve Status of Traditional Greenbacks, Says New Fed Report

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The Fed is seeking comments on the concept of a blockchain-based US dollar until May 20.

Key Points On Thursday, January 20, the US Federal Reserve released its long-awaited working paper that outlines the debate over whether the US should consider rolling out its own central bank digital currency (CBDC) based on the cryptography. The Fed appears to be leaning back in the report to take a neutral stance on the matter to avoid a political backlash. The document lists 22 issues on which the Fed awaits public comment until May 20, 2022.

Last Thursday, January 20, the US Federal Reserve released its long-awaited working paper which outlines the debate over whether the US should consider deploying its own cryptocurrency in the form of a digital currency. central bank (CBDC).

What is a CBDC?

A CBDC refers to the virtual form of fiat currency built on a private blockchain that is managed or authorized by a government in support of its country’s official currency. CBDCs are usually regulated and issued by a country’s central bank or governing monetary agency. Since CBDCs are created by their respective country, they also enjoy the full trust and credit of that issuing government.

Would a US government crypto-dollar be safe for everyday use?

The Fed’s 40-page report “Money and Payments: The US Dollar in the Age of Digital Transformation” examines the pros and cons of CBDCs, the different features they can be programmed with, their variety of uses, and more. .

Salman Banaei, Public Policy Manager, North America, for blockchain data platform Chainalysis, shared with me in an email exchange that he thinks a US CBDC would be a safe way for consumers to try blockchain-based currencies.

“That’s because it represents a liability on the Fed’s balance sheet versus a commercial bank’s balance sheet. As such, it would be the most desirable form of holding cash, especially during times of market turmoil where the solvency of a bank or other financial institution could be in question. A stablecoin issued by a commercial bank would, on the other hand, be a riskier proposition,” Banaei said.

A US CBDC could raise global reserve status against the US dollar

Beyond security, another compelling use case for a US CBDC featured in the report would be the potential positive impact it could have on the traditional US dollar, as shown in this excerpt from the article:

“The dollar is the world’s most widely used currency for payments and investments; it also serves as the world’s reserve currency. The international role of the dollar benefits the United States, among other things, by reducing transaction costs and borrowing for U.S. households, businesses, and businesses. The international role of the dollar also allows the U.S. to influence the norms of the global monetary system.

Today, the dollar is widely used around the world because of the depth and liquidity of U.S. financial markets, the size and openness of the U.S. economy, and international trust in U.S. institutions and the world. rule of law. It is, however, important to consider the implications of a potential future state in which many foreign countries and currency unions may have introduced CBDCs. Some have suggested that if these new CBDCs were more attractive than existing forms of the US dollar, the global use of the dollar might decline – and a US CBDC could help preserve the dollar’s international role.”

If the United States does eventually launch its own CBDC, it has several levers to drive adoption at home and abroad. For example, one way the U.S. government could drive adoption of U.S. electronic dollars would be to issue foreign aid only in the form of its U.S. CBDC. Such a tough move would virtually guarantee rapid and universal use since the United States provides aid to more than 200 countries around the world.

The Fed is moving slightly on an official crypto-dollar

However, this type of power play would be out of place, as the Fed is taking a cautious approach to the whole idea of ​​a US digital dollar initially. The Fed reiterated repeatedly in the document that it does not yet have an official position and will only take further steps to develop a CBDC in the context of broad public and intergovernmental support.

“The Fed is making the political decision here not to move any faster than the administration and Congress. You can imagine the backlash if they had announced a plan to move forward with a CBDC or if they had concluded that “a CBDC was not needed. They took a mid-position that is very politically savvy: providing their analysis on the pros and cons of a CBDC as well as a preferred model for the administration and Congress to consider” , Banaei said via email.

The Fed also said it wants to build on this broad public support and plans to conduct targeted outreach activities and convene public forums to foster a dialogue about the prospects for an official U.S. cryptocurrency. In addition, he further stated in his report that he welcomes comments from all stakeholders regarding the 22 specific questions listed on pages 21 and 22 of the discussion paper.

If you would like to provide your personal perspective, the Fed would like answers to its questions submitted by May 20, 2022, using this form.

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