Federal Reserve Chair Jerome Powell on Wednesday shed new light on the possibility of launching a central bank digital currency (CBDC) in the U.S., and stakeholders in the worlds of both monetary policy and cryptocurrency took notice.
"It's obviously more on the frontburner of the Fed than it had been before," said Josh Lipsky, director of the Atlantic Council's GeoEconomics Center, which has closely tracked the rollout of central bank digital currencies worldwide.
CBDCs are essentially just digital money issued by a central bank. A total of 81 countries around the world are in some stage of adoption, according to the GeoEconomic Center's tracker.
The basic argument for adoption is that CBDCs would support faster payments and greater efficiency in moving money within the economy.
The argument against is that consumers would hold their money with the Fed rather than the banking system, which would drive up interest rates as banks tried to compete for deposits. Also it has the potential to make the economy more vulnerable to cyberattacks.
As global interest has grown, some proponents of CBDCs have urged the Fed to pick up the pace or miss the boat, but Powell has consistently called for a more cautious approach.
"I don't think we're behind," Powell told reporters after this week's FOMC meeting. "I think it's more important to do this right than to do it fast. We are the world's reserve currency, and I think we're in a good place to make that analysis and make that decision."
A Digital Ecosystem
Powell's slow-and-steady sentiment was expected. The interesting update came as the Fed Chair addressed the wider ecosystem of digital currencies.
"There's extensive private innovation, a lot of which is taking place outside the regulatory perimeter," he said. "Innovation is fantastic. Our economy runs on innovation, but where the public's money is concerned we need to make sure that appropriate regulatory protections are in place, and today they really are not in some cases."
These comments echo other government officials, such as SEC Chair Gary Gensler, who have called for more regulation of cryptocurrencies, while at the same time giving credence to the significant private innovation that has already taken place in the crypto space.
"I'm pretty encouraged by what Chair Powell said in one way," said Denelle Dixon, CEO of the Stellar Development Foundation, a network for storing and moving digital currencies. "He said that he recognizes the importance of innovation, and I think that's a really important statement to make, especially when faced with the opportunity to innovate with the digital dollar."
Dixon added that CBDCs can exist side-by-side with private digital currencies and that the Fed should leverage innovators' knowledge and experience.
Lipsky also noted that Powell seems interested in how CBDCs fit into the larger crypto space.
"What he's thinking through is a digital currency ecosystem," he said. "CBDCs will not be created in a vacuum. Their creation will impact stablecoins. They will impact cryptocurrencies like bitcoin and others."
'Meeting of the Minds'
In addition, Powell stressed the need for any rollout to be collaborative.
"We would have to have a meeting of the minds with the administration and also probably with Congress," he said. "We would really like to have broad support for this."
Indeed, Powell, whose background is in law, has made it clear that he does not believe the Federal Reserve can launch a CBDC under its existing legal authority.
"So that means that they will need either standalone legislation or an amendment to the Federal Reserve Act, even potentially for a pilot project let alone a full-scale rollout," Lipsky said.
The Fed is currently working on two different white papers looking at digital currencies. One, developed with MIT, tackles the technical aspects of implementation and is due out this fall. The other looks into the policy implications of CBDCs and is coming "soon," according to Powell.
"Bottom line, we haven't made a decision about the CBDC, but we will be issuing a discussion paper soon in order to form the basis of this public interaction that we'll have," he said.
Once those reports are released, a public comment period will begin that Dixon hopes will lead to further communication between the government and private sector.
"The government has a perspective, and certainly the Fed has a perspective," she said. "Then there's folks who have been innovating and building in this space, and there's perspective there. I think it's really important to have those two perspectives communicate in a real way."
While generally sympathetic to Powell's approach, Lipsky maintained that the Fed is in danger of missing out on playing a leadership role in CBDC adoption if it doesn't move quicker.
"We are the world's currency, which means we should innovate from a position of strength," he said. "Don't sit out on the sidelines because you might not like the end result three to five years from now."
China, for instance, is currently piloting a digital currency in select cities, even as it leads a wider crackdown on cryptocurrencies across the country.
The total ban on cryptocurrency-related transactions, which the People's Bank of China announced on Friday, is the worst-case scenario for those who were concerned that CBDCs would effectively replace private crypto options.
