The Federal Reserve explores the benefits and drawbacks of launching a prospective US CBDC

• The Federal Reserve, the United States’ central bank, has produced a discussion paper that explores the benefits and drawbacks of launching a prospective US CBDC.

• Powell stated last year that the primary value of a CBDC may be to replace cryptocurrencies, including stablecoins.

• According to the Federal Reserve, it is still unknown if CBDCs would benefit the American economy.

• This is the Federal’s first public discussion with the general people to evaluate whether and how the digital form of the dollar may assist the domestic financial system.

Will CBDC replace cryptocurrencies?

Consumers and companies have long kept and moved money in digital forms, such as bank accounts or online transactions, according to the organization. As a result, a hypothetical central bank digital currency might continue the trend by offering a “secure, digital payment alternative for consumers and companies.” Furthermore, CBDC transactions may result in better international settlement chances.

However, because the government would control the monetary product, the digital version of the US dollar might be harmful to people’s privacy. It may also be harmful to America’s financial stability and fail to progress existing payment methods.

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Powell stated last year that the primary value of a CBDC may replace cryptocurrencies, including stablecoins. Nonetheless, he changed his mind earlier this month and indicated that central bank digital currencies and stablecoins may coexist.

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Money used in China will not operate in the US

While several nations, led by China, are racing to create their own central bank digital currencies and integrate them into their monetary networks, the United States is not in a hurry. More than a year ago, Jerome Powell, Chairman of the Federal Reserve, guaranteed that the world’s biggest economy will “carefully and deliberately” investigate the issue before making a decision.

The Chair of the Federal Reserve stated in April 2021 that the United States should not adopt the Chinese model of a central bank digital currency. He believes that the two economic superpowers are extremely different and need various approaches:

“The money in use in China is not one that would operate here.” It is one that permits the government to view every payment that is made in real-time.”

What is a CBDC?

It is a virtual representation of a fiat currency, which is government-issued money that is not backed by other commodities such as gold or silver. In a sense, a CBDC is just the digital equivalent of a country’s official currency. 

These currencies, which are nothing more than computer code, might be recorded on central ledgers within a country’s central bank or on a distributed ledger, similar to how private cryptocurrencies like bitcoin are.

A wake-up call for the national government

The development of cryptocurrencies is a wake-up call for national governments, which have long had a monopoly on the money supply. Concerns about the danger to that monopoly appear to be pushing interest in CBDCs, according to Gustav Peebles, an anthropology professor and expert in monetary history, philosophy, and policy at The New School in New York City.