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The Federal Reserve wants to speed up the development of a digital dollar. That's what Fed Chair Jerome Powell said last week well-known. The central bank sees the emergence of virtual currencies as a risk to the stability of the financial system. That is why it wants to develop an alternative ready in the form of central bank digital money.
The central bank is particularly concerned about so-called stablecoins, because these virtual currencies can also be used as a means of payment. Unlike Bitcoin and Ethereum, stablecoins have a stable rate, making them more suitable as a means of payment. Stablecoins are virtual currencies backed by an underlying asset, for example, government bonds. That sounds safe, but according to the Powell, no one can guarantee that these coins are always fully backed by collateral.
"These stablecoins use new technology in a way that can increase the efficiency of payments and reduce costs. However, they can also carry risk to its users and to the wider financial system. For example, while the value of stablecoins may be pegged to the value of a dollar, these coins do not offer the same protection as traditional means of payment, such as physical currency or deposits in your bank account.
Thus, as the use of stablecoins increases, our attention must also be focused on the right regulatory and supervisory framework. This also means that we need to pay attention to private initiatives to improve payments that are currently not covered by the traditional regulation of banks, investment firms and other financial intermediaries."
Powell's statements are striking, because the dollar does not have a spotless reputation either. Consider, for example, the devaluation of the dollar against gold in 1934 and the complete abandonment of the gold peg in 1971. Since then, the dollar has also not been backed by tangible value.
Interest in cryptocurrencies has increased significantly since the start of the corona crisis. Many people are fed up with the extremely low savings rates and the central bank's monetary policy. That is why people are looking for alternatives. Especially for the savings account, but also for daily payments. Most virtual currencies are still too volatile to use as a means of payment, but stablecoins can play a role in this. These cryptocurrencies offer the convenience of instant digital payments, without major price fluctuations.
The Federal Reserve is still in the early stages of developing a digital dollar. While the Chinese central bank Digital Yuan has already tested it on a large scale, the US central bank has yet to develop its own digital currency. The Fed says it has been researching the pros and cons of central bank digital money for several years, but still wonders how this new form of money can add value to the payment system. Powell reiterated that central bank digital money should complement existing money, such as coins, banknotes and bank balances.
This contribution comes from Geotrendlines
