The global digital currency race has heightened the threat to traditional monetary policy and the dollar’s dominance, enough for the Federal Reserve of Boston to make a concerted effort to keep pace.
The Boston Fed and the Massachusetts Institute of Technology will build and test a digital currency “oriented to central bank uses.” The project's digital currency is hypothetical, given the U.S. has not formally announced a central bank digital currency. But it’s likely the U.S. will have no choice but to pursue this path, given the scale of the global parties that are pursuing the technology.
China and the Libra stablecoin project (which originated from Facebook) are both drawing a lot of attention, and play prominently in the MIT/Fed project’s materials, which states “Digital currency is direct central bank money (like cash) that exists only in digital form. No G20 country has fully launched a central bank digital currency, or CBDC, but China and Sweden are among those working on it. Private firms are also perfecting digital money, with Facebook’s Libra project among the best known.” The project’s representatives were not available for an interview before deadline.?The Fed and MIT envision several use cases for a U.S. digital currency, such as cutting costs from international transfers and faster government transfers to individuals. The lack of such a rail has already caused problems, given the government's lackluster performance in disbursing stimulus payments during the pandemic. It’s a near certainty the U.S. won’t have a digital currency before the next round of stimulus payments.
And the biggest hurdles may not be technological.
“I’m not sure that bringing in MIT will help advance a CBDC initiative in the U.S. more quickly,” said Talie Baker, a senior analyst at Aite. “There are many concerns other than technology that need to be addressed, the biggest hurdles are political in addition to philosophical decisions around the creation of money and the impacts CBDC would have to competition amongst banks in the US.”
The Fed/MIT project contends a CBDC could prevent private sector monopolies on digital currencies, suggesting private currencies may base revenue models on mining user data, causing privacy issues. There’s a risk to resilience in the monetary system if the private digital currency market becomes too top-heavy.
These concerns indirectly reference Libra, though the Libra project has changed its structure to peg its stablecoins to individual government currencies in an effort to address claims Libra could undermine traditional monetary policy. Libra, which is slated to launch later this year, has been the subject of almost constant controversy, mostly over Facebook’s affiliation and broader privacy issues tied to the social network.