Bloomberg
The dynamics of the Federal Reserve’s digital dollar worries Wall Street
(Bloomberg) – The financial services industry, poised for what could be its biggest breakthrough in decades, is about to catch a glimpse of the Federal Reserve’s work in a new digital currency. Wall Street is not enthusiastic. Banks, credit card companies and digital payment processors are nervously watching the urge to create an electronic alternative to the paper notes that Americans carry in their wallets, or what some call the digital dollar and others call Fedcoin. As early as July, officials at the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology, which has been developing prototypes for a digital dollar platform, plan to reveal their research, said James Cunha, who leads the project for the Boston Fed. A digital currency can fundamentally change the way Americans use money, leading some financial firms to lobby the Fed and Congress to delay its creation – or at least to ensure that they are not eliminated. Seeing the threat to their profits, the banks’ main trading group told Congress that a digital dollar is not needed, while payment companies like Visa Inc. and Mastercard Inc. are trying to work with central banks to ensure that the new currencies can be used on your networks. all participants with an entirely new form of payment, ”said Michael Del Grosso, an analyst at Compass Point Research & Trading LLC. Lawmakers, US Treasury Department officials and the Fed have yet to approve the launch of a U.S. virtual currency, which may still be years away. Nor have they decided how a digital dollar would interact with the existing global payment network. Still, the United States and other countries seem committed enough to digitize their currencies that are making financial executives nervous. “The fire has been lit,” said Josh Lipsky, who helped summon officials from the US and other countries working with digital currencies as director of the GeoEconomics Center at the Atlantic Council. “The world is moving very quickly on these projects.” At issue are the forms of digital money being considered by the United States and other governments. The growing popularity of Bitcoin, Ethereum and other cryptocurrencies, whose market value has grown to over $ 1 trillion, inspired the projects. Unlike privately created tokens, the new currencies would be issued by central banks as an alternative to paper notes. The money would not go away, but its use would likely decrease. Using the coins could be as simple as holding a cell phone screen to scan. Behind the scenes, digital money was passed from one account to another. This is similar to the way most money already works – most US dollars are just digital entries into bank accounts – but the new currency could bypass a commercial bank or credit card network. For suppliers, settlement would happen almost immediately, without having to wait for money or worry about fraud. The US effort had an extra boost last month, when Treasury Secretary Janet Yellen said that such a project could help Americans who do not have access to the banking system. In video comments last week at a payments conference in Basel, Switzerland, Federal Reserve Chairman Jerome Powell may have alleviated some of the concerns of banks when he said that “digital currencies would need to be integrated into existing payment systems alongside with money and other forms of money. ”Cunha said the Boston Fed and MIT hope to reveal some of their work in the third quarter, including at least two prototype software platforms that can move, store and settle transactions made with digital dollars. He did not say whether any of the platforms use the blockchain technology underlying Bitcoin and other cryptocurrencies. Once the prototypes are released, said Cunha, others will be able to see and develop the code. The Fed’s work aims to show what is possible without taking a position on the main issues that the central bank, the Treasury and Congress must address, said Cunha. This includes whether the Fed itself should host customer accounts, allow anonymity and what protections consumers would have in the event of a cyber breach or incorrect transaction. it will take about a year, ”said Cunha. “This will require significant reach for the industry and a serious debate.” The potential for the central bank to cut banks from their role as an intermediary in the US’s lucrative payment system is causing distress among banks. So is the impetus from Democratic Senator Sherrod of Ohio Brown, the new chairman of the Senate Banking Committee. Brown is urging the Fed to act quickly to create digital currency accounts for Americans who cannot easily access the financial system and have been forced to deal with payment creditors who charge higher fees and interest rates. Brown’s plan could threaten the deposits commercial banks rely on to make mortgages and other loans. “Rushing anything of this potential magnitude can have unintended consequences that threaten the stability of the banking system, without significantly contributing to economic inclusion,” said Steve Kenneally, senior vice president of payments at the American Bankers Association. ABA, which claims to be lobbying Congress on the issue last year, in written testimony, called the digital dollar an expensive solution in search of a non-existent problem. Two lobbyists at a large bank said, ‘Be in touch with lawmakers to follow up on the matter. They hope the lobby will improve as soon as banks can really see the Fed’s work and how it can affect them, said lobbyists, who asked to remain anonymous to discuss internal conversations. Interest in a digital currency has gained momentum in part because many banks take days to give consumers access to checks deposited in their accounts and some charge high overdraft fees. Those who do not have bank accounts sometimes have to pay high fees to cash paychecks or pass money on to relatives. Some of the profits from credit card companies, such as Visa and Mastercard, may be at risk if the new currencies allow Americans to make transactions more easily without their involvement and fees. Spokesmen for both companies say their companies are working with central banks to ensure that the new currencies can operate on their networks. In February, Mastercard began issuing prepaid debit cards loaded with “Sand Dollar”, a digital currency issued by the Bahamas. “We are increasingly talking to central banks as they think about creating a potential digital currency for the central bank, CBDC, and we are talking to them about how they think about design,” said Oliver Jenkyn, President of Visa for North America, at a Morgan Stanley conference earlier this month. “So there is a lot of talk, but there is actually a lot of action alongside that as well.” Other countries are further ahead. China is currently testing a digital yuan in several cities. Lipsky said there was a chance that his currency would be ready for a broader debut at the Beijing 2022 Winter Olympics, which he said could cause tensions if American athletes were asked to use a currency that the Chinese government could track completely… a letter to Powell urging him to speed up research. development by Facebook Inc. and other companies in its own cryptocurrency, previously called Libra. That currency, renamed Diem, was scheduled to launch in 2020, but has been struggling to gain regulatory approval. Bitcoin, have mixed feelings about the Federal Reserve’s entry into the industry. A Fedcoin could acclimate Americans to buying Bitcoin, said Jerry Brito, who directs and the Coin Center, a cryptocurrency advocacy group. But, depending on the direction of the government, such a currency could be used to track Americans’ spending, destroying the partial anonymity that was once the promise of cryptography, he said. A U.S. digital dollar could also put the final nail in Bitcoin’s coffin as a medium of exchange, Brito said. Crypto enthusiasts have already begun to recognize that this is happening anyway and instead tout the currency as a store of value or “digital gold”. For more articles like this, visit us at bloomberg.comSubscribe now to stay on top of the most trusted business news source. © 2021 Bloomberg LP