Powers On…The Fed Approves Cryptocurrency – Kind of – Cointelegraph Magazine
This month, the Board of Governors of the Federal Reserve System of the United States released its highly anticipated report on the country’s possible use and adoption of digital currencies for its financial system. The document is titled “Money and Payments: The US Dollar in the Age of Digital Transformation”, and true to its name, the document is transformative.
Powering up… is a monthly opinion column by Marc Powers, who spent much of his 40-year legal career working complex US securities cases after a stint at the SEC. He is now an adjunct professor at Florida International University College of Law, where he teaches a course on “Blockchain, Crypto and Regulatory Considerations.”
For those who are regular readers of this column, in December I identified the top five blockchain events in 2021. One of them was Fed Chairman Jerome Powell’s comments on his openness to digital assets and a possible coexistence of Fed legacy money and financial systems and cryptocurrencies. He said in public hearings that there is no current need to ban crypto and that he sees value in stablecoins, if properly regulated.
I also opined in this column that the Fed’s approval and issuance of a central bank digital currency appears to be forthcoming. Well, that’s precisely what the report says, although there’s typical cover-up with disclaimers and doublespeak from Washington. Given the significance of the United States creating and adopting its own CBDC, the document is worth highlighting.
The Federal Reserve System and a CBDC
Before going into the contents of the newspaper, let’s see how the Fed self-identify:
“The Federal Reserve System is the central bank of the United States. It performs five general functions to promote the proper functioning of the U.S. economy and, more generally, the public interest.”
These five functions are: 1) to conduct the country’s monetary policy, 2) to promote the stability of the financial system, 3) to promote the safety and soundness of individual financial institutions, 4) to promote the safety and efficiency of the financial system. payment and settlement, and 5) promote consumer protection and community development.
The document is meant to be the “first step” in a public discussion between the Fed and stakeholders on CBDCs, which it defines as a “digital liability of a central bank broadly accessible to the general public.” The document warns that it “is not intended to advance any specific policy outcome”, but the release of the document itself does just that. More often than not, the simple act of raising an issue has the effect of increasing recognition and acceptance of the topic.
The document identifies three forms of money: central bank money, commercial bank money and non-bank money. Federal currency has no credit and liquidity risk, bank currency has, and non-bank currency has the most because it is not subject to rigorous rules and supervision and cannot offer deposit insurance with the Federal Deposit Insurance Corporation. Related companies like PayPal perform balance transfers on their own books using various technologies, such as mobile apps.
Central bank money is a liability of a central bank, commonly referred to as “fiat” or “sovereign” money, and can exist in physical form like banknotes or as digital balances held by commercial banks at the Federal Reserve. Bank money is usually a deposit commonly used by the public and can be in digital form. Although improvements have been made in recent years to the traditional, or legacy, financial system, such as the real-time digital payment network and the planned launch of the FedNow service in 2023, the document acknowledges that challenges remain. One is in the area of cross-border payments, which currently have slow settlement times, high fees and limited accessibility.
Another challenge is the significant number of Americans who, in 2022, still lack access to digital banking and payment services. More than 5% of US households, or more than 7 million Americans, are still unbanked, even though this percentage has decreased from 8.2% over the past 10 years.
Some of the explanations given by the unbanked include that they lack sufficient funds to meet the minimum deposit to open a traditional bank account, that they are suspicious of banks, that they have privacy issues, or that bank fees are too high. All of these seem surprisingly similar to the reasons given by Satoshi Nakamoto in October 2008 for creating the Bitcoin blockchain. The Fed document also indicates that an additional 20% of households have accounts with banks but rely on more expensive financial services such as check cashing services, payday loans and money orders. That totals an astonishing 35 million unbanked or underbanked Americans!
Given the challenges, the paper discusses the recent use of digital assets with cash-like characteristics, such as cryptocurrencies and stablecoins. Significantly, it refers to the President’s Task Force on Financial Markets report published last Novemberwhich notes that “if well-designed and properly regulated, stablecoins could support faster, more efficient, and more inclusive payment options.” Hmm. This is something private companies and crypto traders have known for maybe five years already! But it’s good that our government officials are at least now realizing these benefits.
The paper concludes by explaining how a CBDC could fit into the monetary and payments landscape in the United States. This raises design requirements for privacy, how a CBDC might interfere with traditional methods used by the Fed to regulate the US economy, its need to be accepted and widely transferable between various intermediaries and customers , and the need to be able to identify and combat money laundering and terrorist financing. For me, some of the most telling sentences in the article, showing Powell’s hand, include the discussion in the “Potential Benefits of a CBDC” section.
— “A CBDC could potentially serve as a new foundation for the payment system and as a bridge between different payment services, old and new.” This is something that the international regulatory think tank Global Digital Finance wrote in its article “The Age of Public Digital Currency: A Guide to Issuance”, of which I was one of the authors.
— “A US CBDC would provide the general public with broad access to digital currency without credit risk or liquidity risk.”
— “Another potential benefit of a US-issued CBDC could be to preserve the dominant international role of the US dollar.” It’s a topic and concern I wrote approximately in February 2021.
— “Some have suggested that a CBDC could reduce common barriers to financial inclusion and could reduce transaction costs, which could be particularly helpful for low-income households.” It’s certainly a worthwhile benefit and something I can see the Biden administration wanting and getting.
A final noteworthy fact mentioned in the document is the decline of cash and banknotes. Cash usage has fallen from over 40% of transactions in 2012 to 19% in 2020. Given all of this, it will be interesting to hear more about this from the Fed and other agencies. government and officials in the months to come.
Mark Powers is currently an Adjunct Professor at Florida International University College of Law, where he teaches “Blockchain, Crypto and Regulatory Considerations” and “Fintech Law”. He recently retired from practicing at law firm Am Law 100, where he built both his national securities litigation and enforcement team and his securities industry practice. hedge funds. Marc began his legal career in the Enforcement Division of the SEC. In his 40 years of practicing law, he has been involved in representations such as the Bernie Madoff Ponzi scheme, a recent presidential pardon, and the insider trading trial of Martha Stewart.
The opinions expressed are those of the author alone and do not necessarily reflect the views of Cointelegraph or the Florida International University College of Law or its affiliates. This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice.