State digital money can certainly have its meaning, said the head of the US Federal Reserve. He sees demand for it in other countries rather than in the USA.
Digital dollars are a solution to finding a problem - at least for the US and according to Jerome Powell, chairman of the US Federal Reserve. Digital central bank currencies may be beneficial in some countries around the world, but if they are "relevant in the US context" is another question. Powell had written on Nov 19, 2019 in a letter to two congressmen.
"Overall, we observe that characteristics that make the development of a central bank digital currency more immediately compelling for some countries differ from those of the U.S.", he wrote. The head of the central bank responded to a letter sent to him by the two representatives in October. In it they asked a series of questions, including plans for the issue of such a currency.
What are these features? Some countries, Powell argues, may well think about the introduction of digital central bank currencies because they have experienced a "quick turn away from cash". This is worrisome for central bankers because government provision of notes and coins ensures them a direct presence in the consumer payments market. Completely abandoning this area, they fear, could create new risks for individuals and the economy.
But in the US, Powell reports, demand for physical money is "still robust". Consumers used cash for 26 percent of their payments during 2018, four percentage points less than the year before (debit and credit cards were 28 percent and 23 percent, respectively).
Another reason some countries think about digital central bank currencies, according to Powell, is that they "lack fast and reliable digital payment services." The US payment landscape, on the other hand, is "highly innovative and competitive" and offers consumers many options.
You do not have to follow Powell's argument - in fact you could say that not even his own bank does that. Unlike many other countries worldwide, the US does not have a widely accessible bank-to-bank system. With the Fed's current system, settlement can take several days, and it's closed on weekends. Although a group of large commercial banks have set up a real-time payment platform, many smaller banks in the country still do not have access to it. The Fed has therefore decided to develop a new public platform. However, the FedNow project is not expected to be completed before 2023 or 2024.
In the world of financial technology, things are changing fast - maybe state-of-the-art payment technology will look strong in four years like the digital currencies of today. But even if the Fed ever wanted to issue a digital currency, according to Powell, some important questions would have to be clarified beforehand:
- Would retailers be required to accept them?
- What impact would it have on financial stability?
- What are the security risks?
- If the system is to detect illegal activity, how private can it be?
- Should the central bank open accounts for millions of normal consumers?
What shone in Powell's letter by absence was the topic of China. The private digital payment platforms WeChat Pay and AliPay have already become ubiquitous and are expanding into many other countries. China itself hints at wanting to launch "a digital currency" soon, which would make it the first major economy with such a currency. According to representatives of the People's Bank of China, the currency will be compatible with WeChat Pay and AliPay. Some also expect China to see its digital yuan used as an international reserve currency. Currently, the world's most important reserve currency is the US dollar.
A digital dollar may not be forthcoming, but the Fed is keeping an eye on the situation with digital currencies. As Powell says, she also closely monitors the Facebook-proposed cryptocurrency Libra. "We also continue to do our own research, including small-scale technology experiments designed to gain hands-on experience", writes Powell. "These activities enable the Fed to respond more quickly to rapid developments in the field."