Fed looks into backing cryptocurrency

The Federal Reserve is taking a hard look at the cryptocurrency market, with an eye toward issuing its own. Fed Chairman Jerome Powel first announced the "possibility of issuing" a digital currency (as cryptocurrencies are often described) last month. Fed Governor Lael Brainard later described the Fed's work in greater detail in remarks to a crypto conference.

Items on the Fed's to-do list include:

• Publication of a discussion paper for public comment this summer laying out the Fed's current thinking on digital currencies
• Initiatives at the Atlanta and Cleveland Federal Reserve Banks exploring how central bank digital currencies (CBDCs) can improve financial inclusion
• A collaboration between the Boston Fed and the Massachusetts Institute of Technology to build and test a hypothetical digital currency platform.

In remarks to the CoinDesk 2021 conference, Brainard said the Fed is concerned the proliferation of digital currencies that leverage advanced technologies, like blockchain, coupled with growing consumer preferences for digital payments, could trigger consumer protection and financial stability risks.

"Technology is driving dramatic change in the U.S. payments system, which is a vital infrastructure that touches everyone," Brainard told the group. "The Federal Reserve remains committed to ensuring a safe, inclusive, efficient and innovative payment system that works for all Americans."

Several iterations of digital currencies, like Bitcoin, fluctuate wildly in value, primarily because there are only a limited number available – about 21 million in the case of Bitcoin. At the start of 2020, the price of a single Bitcoin was $7,200; in May 2021 it hit $64,000.

Some digital currencies, known as stablecoins, are pegged to traditional stores of value; U.S. Dollar Coin, for example, is tied to the U.S. dollar. Unlike the U.S. dollar, however, stablecoins lack legal tender status; they are, in effect, private forms of money.

"It is not obvious that new forms of private money that reference fiat currency, like stablecoins, can carry the same level of protection as bank deposits or fiat currency," Brainard said. "New forms of private money may introduce counterparty risk into the payments system in new ways that could lead to consumer protection threats or, at large scale, broader financial stability risks."

Digital currency backed by the Fed, on the other hand, would be safe and available to the general public, thereby reducing risks associated with consumer protection and financial stability.

"The Federal Reserve remains committed to ensuring that the public has access to safe, reliable and secure means of payment, including cash" the Fed governor said. "As part of this commitment, we must explore – and try to anticipate – the extent to which households' and businesses' needs and preferences may migrate further to digital payments over time."

Pandemic, other central banks, spur action

Experiences connected to the COVID-19 pandemic helped spur the Fed to action, Brainard said. Nearly one in four American households are either unbanked of underbanked, according to the Federal Deposit Insurance Corp., and getting government COVID-relief payments to those households proved challenging.

"The challenges of getting relief payments to these households highlighted the benefits of delivering payments more quickly, cheaply and seamless through digital means," Brainard said.

The Fed's work on FedNow, a new real-time payments infrastructure scheduled to be available in 2023 or 2024 will help on that count, she noted, adding that it could also reduce transaction costs and foster innovation.

Several other counties are investigating and/or experimenting with CBDCs, including China, which has developed a CBDC that is being piloted in several cities there. Brainard said the Fed is working with several other central banks, as well as with international standards boards to improve cross-boarder payments using CBDCs—and to root out illicit activities tied to cryptocurrencies.

Bitcoin, for example, is a preferred collection method for ransomware attacks. JBS Foods reportedly paid $4.4 million in Bitcoin to get its meat-packing plants back online last week.

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