The dollar is entering the crypto age, and the U.S. government is poised to give its clearest signal yet on how that will happen.
The guidance will come through a trio of pending reports related to public and private efforts to digitize the world’s global reserve currency. First, the Federal Reserve Board will release a paper as soon as this month on the U.S. payments system that’s expected to provide direction on whether the country should issue a so-called central bank digital currency. Soon after, the Fed Bank of Boston will publish long-awaited research and open-source computer code on technology that could underpin a digital dollar. Finally, the President’s Working Group on Financial Markets is set to issue policy recommendations on how to regulate stablecoins, which are in effect digital dollars created by private companies.
When put together, the three reports will provide a road map for the broader financial community on how the Fed and Biden administration see the dollar’s crypto future playing out, the extent to which they embrace adoption of a digital currency and the guardrails they may see as necessary to protect individuals and investors in what’s now a largely unregulated corner of the market. What was once seen as a distant project has taken on an increased sense of urgency as the value of digital assets has exploded to about $2 trillion and other countries, such as China, move forward rapidly with plans for their own sovereign digital currencies.
“This has gone from, ‘It’s an interesting idea,’ a few years ago to, ‘We need to have a pilot project,’” said Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center, of a Fed-issued digital dollar.
The Fed Board’s paper is expected to focus on the U.S. payments system as well as the potential prospects of a Fed-issued digital currency. Over the past several months, U.S. central bankers have been divided over whether creating a digital dollar is wise, with Fed Vice Chair for Supervision Randal Quarles describing its benefits as “unclear” and its risks “significant and concrete.”
Proponents of creating central bank digital currencies, or CBDCs, say they can speed up payments, reduce their cost, and increase access to the financial system for the underbanked. There are also risks, though. A group of world central banks including the Fed, the Bank of England, and the European Central Bank last week issued a report warning that CBDCs could exacerbate bank runs by making it easier for depositors to clear out their cash during a crisis.
The ultimate issuance of a CBDC would take years and the Fed would prefer Congress to pass legislation authorizing its issuance, Fed Chair Jerome Powell has said.
The second paper, from the Boston Fed, could begin to set technological standards that would be important not just for the rollout of a U.S. digital currency, but for others already being developed around the world, said the Atlantic Council’s Lipsky.
Integration with the U.S. payments system is crucial to most countries’ economies, which means any guidance the Fed gives on what to do about privacy tradeoffs and other attributes could end up molding foreign efforts, Lipsky said.
While an official U.S. digital currency -- if it happens -- will take years to come about, a cadre of private companies, including Tether International Ltd. and Circle Internet Financial Inc., have launched their own versions, with tokens in circulation now worth more than $120 billion. That trend is what will be addressed by the third paper, which will be released by the President’s Working Group on Financial Markets, a collection of the leaders of U.S. agencies including the Fed and the U.S. Treasury Department.