The Fed is advancing its efforts to develop a digital currency - and says it will publish a research report this summer
- Fed Chair Jerome Powell revealed on Thursday that the central bank has taken further steps in its exploration of a digital currency.
- Powell said the Fed will release a research report this summer outlining their current thinking on digital payments.
- The Fed chief also said cryptocurrencies have not found a way to make payments convenient, blaming their volatile price swings.
Federal Reserve Chair Jerome Powell on Thursday revealed that the central bank has taken further steps in its exploration of a digital currency and will be releasing a discussion paper this summer outlining its current thinking on digital payments.
Powell in a video published on Thursday highlighted how technological advancements have enabled the bank to develop a central bank digital currency, or CBDC.
A CBDC is a type of central bank liability - just like the US dollar - issued in digital form, which could be designed for use by the general public.
The chairman noted that the central bank has been exploring the benefits and risks of a CBDC in the past, focusing on whether it could improve what he said is the "already safe, effective, dynamic, and efficient" domestic payments system in the US.
"We think it is important that any potential CBDC could serve as a complement to, and not a replacement of, cash and current private-sector digital forms of the dollar, such as deposits at commercial banks," he said.
The Boston Fed teamed up with the Massachusetts Institute of Technology in August 2020 for a multi-year collaboration to explore CBDCs with the Digital Currency Initiative.
Powell said the forthcoming discussion paper is meant to "stimulate broad conversation" from the public and elected officials on issues related to payments, financial inclusion, data privacy, and information security.
He added that the design of a CBDC needs to look into monetary policy, financial stability, consumer protection, legal, and privacy considerations, among others.
"Irrespective of the conclusion we ultimately reach, we expect to play a leading role in developing international standards for CBDCs, engaging actively with central banks in other jurisdictions as well as regulators and supervisors here in the United States throughout that process," the chair said.
A number of central banks have been exploring CBDCs spurred by strong momentum in the cryptocurrency space this year.
China has been leading the race since developing its digital currency electronic payment CBDC in 2014 and testing a pilot in 2020.
In April, Norway - the world's most cashless country - announced it would start testing various solutions for a CBDC, while the UK said it is coordinating exploratory work on a potential CBDC, dubbed "Britcoin."
The comment of the Fed chief comes just hours after the Treasury Department revealed its plans to have any cryptocurrency transfers of at least $10,000 be reported to the Internal Revenue Service.
The global cryptocurrency space saw a seven-day sell-off that wiped out 47% of its entire market valuation on Wednesday. But on Thursday, the market cap came in at $1.86 trillion, climbing 37% from the previous session's low of $1.35 trillion, according to data from CoinMarketCap.com.
"To date, cryptocurrencies have not served as a convenient way to make payments, given, among other factors, their swings in value," Powell said.
Former Fed chief and now Treasury Secretary Janet Yellen has, in the past, cast her doubts on cryptocurrencies, particularly bitcoin.
"To the extent it is used, I fear it's often for illicit finance," Yellen told the DealBook DC Policy Project in February. "It is a highly speculative asset and you know I think people should be aware it can be extremely volatile and I do worry about potential losses that investors can suffer."