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  • J McGlynn and M Bacina

Federal bank confirms CBDCs as a possible state defence against stress events like COVID-19

Updated: Nov 19, 2020

Just two weeks after the Central bank of the Bahamas announced it was set to become the first country in the world to launch a central bank digital currency (CBDC) (the Sand Dollar), President and CEO of the Federal Reserve Bank of Cleveland, Lorretta Mester, revealed the monetary authority had a interest of its own in CBDCs.

During a keynote speech on September 23, Mester made an important point of the Federal Bank's ongoing research into a potential digital dollar, using it as an example of how the bank is:

making necessary investments to ensure that the U.S. payments system remains resilient in the face of extreme stress events

She underscored the potential usefulness of CBDCs by describing a few ways the digital currency may allow for quicker, more ubiquitous payments in times of emergency and more generally - an idea which was “already gaining increased attention at central banks around the world” even prior to the pandemic.

Cleveland and the Bahamas are not the only ones pushing ahead effort to explore the role a CBDC could play in society. Additionally, Merret listed initiatives from regional Federal Reserve branches who are also investigating CBDCs' potential , including its Boston branch which is working with the Massachusetts Institute of Technology and its New York branch, working in partnership with the Bank for International Settlements.

Be that as it may, despite forging ahead in “building and testing a range of distributed ledger platforms to understand their potential benefits and trade-offs’, Merrit asserted the Federal Bank has made no commitment to pursue the policy processes needed to launch a CBDC. As she put it:

Experimentation like this is an important ingredient in assessing the benefits and costs of a central bank digital currency, but does not signal any decision by the Federal Reserve to adopt such a currency.
Issues raised by central bank digital currency related to financial stability, market structure, security, privacy, and monetary policy all need to be better understood.

As a fairly new concept there is still much to be unpacked and understand about CBDCs risks and benefits so central banks can move forwarded with a wholesale, then retail, issuance.

In any case, it is clear that a growing number of governments seem to be adopting the attitude that the concept of digital currencies should be embraced and investigated, and in turn, that banks should start to create their own digital currencies.

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