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The dollar is entering the crypto era and the US government is poised to give its clearest signal yet on how this will happen.
The guidance will come from a trio of pending reports related to public and private efforts to digitize the global reserve currency. First, the Federal Reserve will release a document on the U.S. payments system as early as this month that is expected to indicate whether the country should issue a so-called central bank digital currency. Soon after, the Boston Fed Bank will release long-awaited research and open source computer code on the technology that could support a digital dollar. Finally, the president’s financial markets task force is expected to make policy recommendations on how to regulate stablecoins, which are actually digital dollars created by private companies.
When brought together, the three reports will provide a roadmap for the entire financial community on how the Fed and the Biden administration view the future of the dollar in crypto, to what extent they embrace the adoption of a digital currency and the safeguards they may see as necessary to protect individuals and investors in what is now a largely unregulated sector of the market. What was once considered a distant project has taken on a heightened sense of urgency as the value of digital assets has exploded to around $ 2 trillion and other countries, like China, move forward quickly. with plans for their own sovereign digital currencies.
“It went from ‘This is an interesting idea’ a few years ago to ‘We have to have a pilot project’,” Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center, said of a dollar digital issued by the Fed.
The Fed Board paper is expected to focus on the US payments system as well as the potential prospects for a digital currency issued by the Fed. In recent months, US central bankers have been divided over the appropriateness of creating a digital dollar, with Fed Vice President Oversight Randal Quarles describing its benefits as’ unclear ‘and its risks’ significant and concrete ”.
Proponents of creating central bank digital currencies, or CBDCs, say they can speed up payments, lower their cost, and increase access to the financial system for those underbanked. But there are also risks. A group of global central banks, including the Fed, the Bank of England and the European Central Bank, issued a report last week warning that CBDCs could exacerbate bank runs by making it easier for depositors to liquidate their cash in the event crisis.
The final issuance of a CBDC would take years and the Fed would prefer Congress to pass legislation authorizing its issuance, Fed Chairman Jerome Powell said.
Recent reports on cryptocurrencies and central bank digital currencies:
The second paper, from the Boston Fed, could begin to set technological standards that would be important not only for the deployment of a U.S. digital currency, but for others already in development around the world, Lipsky said of the Atlantic Council.
Integration with the U.S. payments system is crucial for the economies of most countries, which means that any guidance given by the Fed on what to do regarding tradeoffs in privacy and other attributes could end up influencing foreign efforts, Lipsky said.
While an official U.S. digital currency – if it does – will take years to develop, a group of private companies, including Tether International Ltd. and Circle Internet Financial Inc., have launched their own versions, with tokens in circulation worth over $ 120 billion. It is this trend that will be addressed in the third paper, which will be released by the President’s Task Force on Financial Markets, a collection of heads of US agencies including the Fed and the US Treasury Department.
Federal officials have expressed concern that the reserves of some stable coins are invested in assets such as corporate bonds and related securities that could come under severe stress if investors lose confidence and attempt to cash in their funds. stable coins in one go. Powell and Securities and Exchange Commission Chairman Gary Gensler compared coins to money market funds, which also seek to maintain a dollar’s worth but have sometimes failed under stress.
The report is expected to recommend banking-like regulation for stablecoins providers and for Congress to pass a bill establishing a new type of limited charter to allow crypto banks to manage stablecoins as deposits, said one. senior official involved in the report.
Such regulation could limit what stablecoin providers can do with their reserves, potentially limiting their profits in the name of greater investor protection. Some US stablecoin companies such as Circle and Paxos Trust Company are considering researching or already have some type of banking charter. In contrast, Tether – the issuer of the largest US dollar stable – has so far chosen to try to avoid US regulation and is closing its platform to most US clients.
Treasury officials briefed congressional staff members on their work as recently as last week and said they aimed to release their report for the coming weeks, a person familiar with the briefing said.
The Fed would have a “huge competitive advantage” over private tokens if it launched its own digital dollar, Barclays Plc said in a September research report analyzing the case for a US digital currency.
“With regulation, a Fed CBDC could oust private crypto,” the Barclays report said.
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