THE COWEN INSIGHT
We see the white paper as supporting our view that a digital dollar is inevitable, though the Fed is careful to avoid taking a position. The Fed also said it would not act without congressional authorization. Digital dollar would need to protect privacy, work via the private sector, be interoperable and have AML/BSA controls.
What Does This Mean for the Creation of a Digital Dollar?
We see this supporting our view that the Federal Reserve will issue a digital dollar though it appears we are at least another three to five years from the start of a pilot program. Critical to us is the Federal Reserve’s four guiding principles. We see it as an effort to address pressing concerns even before the public feedback is collected on the white paper. These principles are privacy, private sector involvement, interoperability and AML/ BSA controls.
What Is at Risk If a Digital Dollar Is Adopted?
We believe a digital dollar represents a material threat to debit interchange, peer-to-peer payment systems, money transmitters and stable coins. To us, a digital dollar is a more efficient way to achieve all those objectives. To us, there is less risk to banks. We expect banks to be the primary provider of wallets that hold digital dollars. This will make it easy for consumers to move funds between FDIC-insured accounts and wallets used for transactions. In effect, it could end up similar to how reloadable prepaid debit cards work today. To limit risk of runs on banks, we would expect the Fed to limit how much consumers can hold in digital dollars.
What Does This Mean for Fed Now?
The wild card, in our view, is Fed Now, which is the instant payment system the Federal Reserve will launch next year. This will offer many of the same benefits of a digital dollar by permitting transactions to settle instantly. Rapid adoption of Fed Now by consumers and merchants could satisfy many of the market forces that are pushing the Fed toward a digital dollar.
Even with Fed Now, however, a digital dollar seems likely as it could be used to speed up international payments, especially for global trade. The Fed may also view a digital dollar as needed to ensure the dollar remains the reserve currency. This is especially true if China and the European Union continue to develop digital currencies.
The Fed reiterated its pledge not to issue digital dollar without congressional and White House approval.
The Boston Federal Reserve and MIT have also issued a paper on the technology behind a digital dollar. This includes ensuring there could be a platform capable of handling the volume of transactions that is also safe from hackers.
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