The Fed’s work is meant to show what’s possible without taking a stand on major issues that the central bank, Treasury and Congress must address, Cunha said. These include whether the Fed itself should host customer accounts, whether to allow anonymity, and what protections consumers would have in case of a cyber-breach or mistaken transaction.
“We think it’s important that we not wait for the policy debate because then we’ll be a year or so behind,” Cunha said. “This will take significant outreach to the industry and serious debate.”
The potential that the central bank could cut banks out of their middleman role in the lucrative U.S. payments system is causing angst among banks.
So is the push coming from Ohio Democratic Senator Sherrod Brown, the new chairman of the Senate Banking Committee. Brown is urging the Fed to move quickly to create digital-currency accounts for Americans who can’t easily access the financial system and have been forced to deal with payday lenders who charge higher fees and interest rates. Brown’s plan could threaten the deposits that commercial banks rely on to make mortgages and other loans.
“Rushing anything of this potential magnitude could introduce unintended consequences that threaten the stability of the banking system without contributing meaningfully to economic inclusion,” said Steve Kenneally, senior vice president of payments at the American Bankers Association.
The ABA, which says it’s lobbying Congress on the issue, last year in written testimony called the digital dollar a costly solution in search of a nonexistent problem.
Two lobbyists for a large bank said they’re in contact with lawmakers to keep track of the issue. They expect lobbying to pick up once banks can actually see the Fed’s work and how it might affect them, said the lobbyists, who requested anonymity to discuss internal conversations.
Interest in a digital currency has gathered momentum in part because many banks take days to give consumers access to checks deposited in their accounts and some charge stiff overdraft fees. Those without bank accounts sometimes must pay high fees to cash paychecks or transmit money to relatives.
Some of the profits of credit-card companies, such as Visa and Mastercard, could be at risk if the new currencies let Americans more easily make transactions without their involvement and fees.
Spokespeople from both companies say their firms are working with central banks to ensure the new currencies can run over their networks. Mastercard in February began to issue pre-paid debit cards loaded with the “Sand Dollar,” a digital currency issued by the Bahamas.
“We’re increasingly having conversations with central banks as they think about designing potential central bank digital currency, CBDC, and we’re talking to them about how they think about design,” said Visa’s North America president Oliver Jenkyn, at a Morgan Stanley conference earlier this month. “So there’s a lot of talking, but there’s actually a lot of action alongside it as well.”
Other countries are further along. China is currently piloting a digital yuan in several cities. Lipsky said there’s a chance its currency could be ready for a broader debut at the 2022 Winter Olympics in Beijing, which he said could cause tensions if American athletes are asked to use a currency that the Chinese government can completely track.
Brown earlier this month sent a letter to Powell urging him to speed up the research. “We cannot be left behind,” Brown wrote.
Among other threats, Brown pointed to the development by Facebook Inc. and other companies of their own cryptocurrency, once called Libra. That currency, since renamed Diem, was slated to launch in 2020 but has struggled to win regulatory approval.
Advocates of existing cryptocurrencies, like Bitcoin, have mixed feelings about the Federal Reserve muscling into the industry.
A Fedcoin could acclimate Americans to purchasing Bitcoin, said Jerry Brito, who heads Coin Center, a cryptocurrency advocacy group. But depending on the government’s direction, such a currency could be used to track Americans’ spending, destroying the partial anonymity that was once the promise of crypto, he said.
A U.S. digital dollar could also put the final nail in the coffin for Bitcoin as a means of exchange, Brito said. Crypto enthusiasts have already started to acknowledge that’s happening anyway, and instead tout the currency as a store of value or “digital gold.”
—With assistance from Craig Torres, Carolynn Look and Alexander Weber.
This article was provided by Bloomberg News.