We will issue a CBDC to counter the systemic risk of stablecoins

18. January 2021

Federal Reserve: we will issue a CBDC to counter the systemic risk of stablecoins

According to Chairman Jerome Powell, the United States Federal Reserve needs its own CBDC to crush the possible proliferation of stablecoins

According to Jerome Powell, chairman of the United States Federal Reserve, stablecoins could become very important in a short period of time, almost overnight, which is why the Fed is determined to issue its own CBDC.

CBDCs are the banking world’s answer to stablecoins, which have been all the rage in the crypto sector for a few years now. However, these instruments will Crypto Trader probably have little in common with decentralised cryptocurrencies: CBDCs will be supervised by the banks that issue them, as well as regulated under the laws of their respective jurisdictions.

During an interview with Yahoo Finance, Powell said that advances in technology have allowed private companies to create their own money, and that history has shown that this is a development to be avoided:

“Technology has made this possible, and indeed private companies can create the equivalent of digital money. It has already happened in the past that the public believes that money issued by private companies is real money, only to be disappointed when it turns out not to be. This would be a very negative development, which we need to avoid.”

He also pointed out that the Fed does not yet know

Powell outlined a scenario where stablecoins could suddenly become relevant to a significant number of people, thus becoming a potential systemic risk.

He also pointed out that the Fed does not yet know how it might react to such an event, and that it is not even close to a full understanding of the risks associated with such an eventuality:

“[Stablecoins] could become systemically important overnight, and we are not even close to understanding and managing the risks that would be involved. But the public will expect us to do that, they have every right to expect that. […] It’s one of the top priorities for us.”

However high the priority given to launching its own CBDC, the Fed will not seek to be first to market. Russia, China, Sweden, Australia and the European Central Bank have all made great strides towards launching a CBDC. Nevertheless, Powell believes the US will always have an advantage due to the dollar’s status as the world’s reserve currency:

“Since we are the world’s reserve currency, we think we have to get it right and we don’t feel the need to be first. In fact it means we already have the advantage of being first because we are the reserve currency.”

Powell’s relaxed approach to the prospect of a “CBDC gap” between the world’s superpowers is not shared by everyone, however. In October, a senior official at Japan’s Ministry of Finance issued a warning that China’s CBDC, should it be first to market, could potentially eclipse the fiat currencies of the world’s nations.

The president of the Chinese Finance Association dismissed this idea, adding that the digital yuan is not like Libra and has no intention of replacing international currencies.

According to Powell, a potential “Fedcoin” is still years away. The Fed also seems willing to stand back from privately issued money if it means arriving at a more mature end product:

“We are determined to get it right rather than fast, and that will take some time. […] I’m talking years, not months.”

#Bitcoin