The Federal Reserve revealed last week that it is researching the case for a central bank digital currency. A board member stated that the United States dollar’s global importance hinges on the Fed being on the “frontier of both research and policy development.” The Federal Reserve is taking into consideration at least these five things.
- The Fed must consider if the technology will reduce costs and make payments safer comparatively to the potential risks to the financial system.
- The Fed will need to work with private businesses in the United States to see what new regulation and limitations would need to be established and updated.
- In the past at a cryptocurrency conference in 2018, a board member stated that there was no compelling reason to issue a digital currency. However, it is clear that there is major concern surrounding private digital currencies. Strong consideration to change its policy came from Facebook’s announcement regarding Libra. The Fed’s initiative comes in part based on concerns over who should be able to issue currencies. Financial stability is its primary concern.
- It seems inevitable at this point that central banks from places such as China and Singapore will launch a digital currency within 18 months. America does not need to fall behind. The United States is already communicating with other central banks in order to make sure the international banking system is not shaken due to any surprise developments by major countries.
- Ten percent of global banks surveyed have plans to issue a digital currency by the end of 2022. Even regional banks in other countries have announced plans to launch digital currencies. A recent announcement by the Bank of Cambodia, for example, shows that it is not just the international powerhouses such as JP Morgan that are considering the move.
For community banks in the United States, it is important to keep an eye on the development of digital currency as it will inevitably need to be part of every bank”s long term strategy to adapt to the transformation that currency will go through over the next three years.