Will public discussion in U.S. pave way for central bank digital currencies?

The Federal Reserve Board has released its first report outlining potential benefits and challenges to overcome concerning digital currencies issued by central banks.

The issuance of a digital version of the dollar, a key currency, will have a major impact on the world. It is hoped that the U.S. central bank will thoroughly dig into issues related to the matter.

The Fed was seen as reluctant to issue digital currency. However, China has conducted a number of experiments on the digital yuan, and the European Central Bank has also launched a two-year study to determine whether to introduce its own digital currency.

The Fed report is apparently intended to take domestic public discussions one step forward.

Digital currencies are an electronic version of bills and coins to be used for payments and remittances. Electronic money, which can be used for shopping and other purposes, and cryptocurrency assets, such as bitcoin, have similar functions.

Yet the digital money currently in circulation has been issued by private companies. The central banks of Japan and the United States and the ECB have not recognized crypto assets as currencies because they have no backed assets and their value fluctuates wildly.

On the other hand, a central bank digital currency is backed by national credit, so its value is expected to be stable and could be used at any store.

In the report, the Fed stated that it envisions making digital currency available via private banks and other relevant institutions instead of issuing it directly to individuals, while having it coexist with cash.

As potential benefits of digital currencies, the report cited the convenience that will allow people to make payments and cross-border transactions faster and more cheaply, as well as making it possible to offer financial services to economically vulnerable people who do not have bank accounts, too.

On the other hand, the Fed did not conclude in the report whether it would issue digital currency, instead making support from the U.S. executive branch and Congress a condition for introducing a central bank digital currency. It is only natural for the Fed to consider this matter carefully as the issuance poses numerous challenges.

If cash is used for a purchase, it is hard to track who buys what and where. But the use of digital currency could make it possible for the central bank to obtain people’s whole purchase history. How to protect privacy must be considered.

The report also pointed out that the introduction of a central bank digital currency could affect the stability of the financial system and monetary policy. Risk verification is also essential.

China, which is taking the lead in experimenting with digital currency, said it will allow athletes and relevant people to use the digital yuan via smartphones at facilities related to the Beijing Winter Olympics.

China is believed to intend to expand the use of the digital yuan into cross-border payments in a bid to compete with the key currency of the U.S. dollar. There is also the possibility that Beijing has state control of the flow of funds in mind.

The Bank of Japan has also begun experimenting with digital currency. The BOJ should strengthen cooperation with the Fed and the ECB and deepen discussions on the future of digital currencies.

— The original Japanese article appeared in The Yomiuri Shimbun on Jan. 31, 2022.