US Federal Reserve Researching Possibilities for a Digital Dollar

A few days ago, Federal Reserve Board Governor Lael Brainard came out with a detailed description of the Fed’s research and plans in the potential development of a central bank digital currency, also known as a Digital Dollar. She said that the central bank has been conducting studies over the past few years to determine how a centralized digital currency might affect the current payments ecosystem, monetary policy, the banking sector, and overall financial stability. With that in mind, here’s what we know so far.

Lael Brainard’s Latest Notes

In the speech she held at the Federal Bank of San Francisco headquarters on August 13th, Brainard said that “Given the dollar’s important role, it’s essential that the Federal Reserve remains on the frontier of research and policy development regarding the U.S. central bank digital currency (CBDC).” She later continued by saying “As part of this research, central banks are exploring the potential innovative technologies to offer a digital equivalent for cash”.

In her speech, Brainard also addressed the ongoing situation from her perspective. She cited that the COVID-19 pandemic was one of the most significant issues that reinforced the need to create immediate and trusted access to funds. She said that the ongoing crisis is a dramatic reminder of the importance of a resilient and trusted payment infrastructure that is accessible to all Americans.

She also noted that recipients of stimulus funds spent these funds quickly, which indicates the need for urgent access to funds. “It was notable that after a sharp reduction in spending early in the COVID-19 crisis, many households increased their spending starting on the day they received emergency relief payments.”

Brainard said the existence of other private cryptocurrencies as well as CBDCs, only underscore the importance of addressing and evaluating the cryptocurrency market. “Digital currencies, including central bank digital currencies present opportunities but also risks associated with privacy, illicit activity, and financial stability. This prospect has intensified calls for CBDCs to maintain the sovereign currency as the anchor of the nation’s payment systems.”

Previous Experimentation with the Digital Dollar

The recent research plan for a digital dollar doesn’t exactly come out of the blue. The potential benefits of a digital dollar have been discussed multiple times in the past. Just last November, the Federal Reserve said that the US central bank is carefully analyzing all of the potential costs and benefits of such currency. During that period, the regulator was focused on analyzing the possible effects the digital dollar would have on user privacy and consumer protection.

While we don’t know how far exactly the Federal Reserve has gotten in its experimentation, the Federal Reserve is working with several researchers, including those from MIT, to build and test all of the hypothetical issues of this digital currency. The regulator also said that the code used in these experiments will be open-source at some point in the future, so the general public can also experiment with it.

Even the idea of a digital dollar that would be used to distribute emergency funds is not new. The US Congress has been thinking about this plan since at least March, as far as it is publicly known. With all of this said, no concrete steps have been taken to create a blockchain-based central bank digital currency in the country.