Stable loans in cryptocurrency can become systematically important overnight, says the US Federal Reserve, Jerome Powell, and therefore the Fed is determined to get its own digital currency from the central bank right.
CBDCs are the banking industry’s response to cryptocurrencies. Although often presented in the blockchain, they share little in the way of philosophical parity with their decentralized counterparts. The banks that issue it will oversee CBDCs and it is regulated under the laws of their respective jurisdictions.
In an interview with Yahoo Finance, Powell said that advances in technology have enabled private institutions to create their own money – and that history has shown that this should be avoided:
‘Technology has made this possible and effectively actors in the private sector can create the equivalent of digital money. We know in the past with money from the private sector, the public sometimes sees it only as money, and then at some point they realize that it is not money. This is very bad that we should avoid. ”
Powell could envision a scenario in which stable coins are suddenly relevant for a large number of people to become ‘systemically important’ overnight. He said the Fed still did not know how to react to such an event, acknowledging that it did not even understand the risks:
‘[Stablecoins] can become systematically important overnight and we do not start to hold the potential risks, how to manage the risks – and the public will expect us to do so, and have every right to expect that […] This is a very high priority. ”
While launching a CBDC may be a high priority, the Fed will not fall into the trap of trying to be the first. Russia, China, Sweden, Australia and the European Central Bank have all taken steps to launch a CBDC (some are further than others), but according to Powell, the US will always benefit first because of the dollar’s status as the world’s reserve currency:
‘Since we are the world’s reserve currency, we think we need to get it right, and we do not feel urgent or necessary to be first. Effectively, this means that we already have a first advantage because we are the reserve currency. ‘
Powell’s relaxed approach to the prospect of a ‘CBDC gap’ between world powers is not shared by all. In October, a senior Japanese finance minister warned that China’s digital currency could embezzle the money of world countries if the digital yuan benefits from the first position.
The president of the Chinese Finance Association rejected this idea, adding that the digital yuan was not like Libra, and that it did not intend to replace international currencies.
According to Powell, he’s still years away from any prospective “Fedcoin” determined to do it right, rather than do it fast – even if it means losing money to money in the private sector in the meantime.
‘We’m determined to do it rather than fast, and it’s going to take a while. […] Measured in years rather than months. ”