Fed officials begin to explain how Fedcoin could work

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Fed policymakers have said that a digital dollar could move money faster and cheaper through the financial system, bring people who do not have bank accounts into the financial system, provide to government an efficient means of distributing financial aid and even allowing merchants to avoid fees to credit card processors.

But Fed officials have not touted the potential benefits of the way they conduct monetary policy. And many details about exactly how people would access digital dollars, and how a Fedcoin would fit into the financial system, remain unclear.

In an appearance on Wednesday, Eric Rosengren explained how a digital dollar might work in practice, describing a setup much like a cross between Apple Pay and Venmo.

“We are really literally talking about the equivalent of money, but you are using your phone rather than carrying money in your wallet,” Mr. Rosengren said. “You can probably do the transactions through a wallet on a phone,” he said adding “you can transfer funds anywhere in the country anywhere in the world using this technology.”

In March, James Cunha, senior vice president of secure payments and FinTech research at the Boston Fed, explained how he envisions a Fedcoin integrating into the banking system. He said that a digital dollar account can appear as just another entry in a person’s regular private bank account.

“I see [a bank] showing your savings, check and [central bank digital currency]Mr. Cunha said. “It would be a separate account, but your bank could make it look like a brokerage account,” and users could effortlessly transfer money as needed, he said. .

More details could come soon. Randal Quarles, the Fed’s key man on financial regulation, is scheduled to speak on digital currency at the Utah Bankers Association’s annual convention on Monday.

The Fed is slowly advancing the digital dollar project. Officials have ignored the idea that China’s faster adoption of a digital yuan could threaten the dollar’s primacy. In March, Fed Chairman Jerome Powell said it was more important to master the digital dollar than to be first to market, in part because of the dollar’s vital global role.

New York Fed Chairman John Williams played down the Chinese challenge on Monday.

“When you look at other jurisdictions where they’ve kind of pushed this… it’s really for specific reasons in this country,” he said. “You certainly cannot generalize from the experience of China or other countries,” he added.

Later this summer, the Fed is expected to set out its take on how rapid changes in technology are affecting the payments system and how that could impact the Fed’s launch of a digital dollar.

After that, the Boston Fed, which is leading a research project on the dollar in collaboration with the Massachusetts Institute of Technology, will also publish work on some of the technical issues surrounding a possible Fedcoin.

The Boston Fed Bank website lists two men working on the project, as well as professors and students at MIT. A bank spokesperson declined to say how much the Boston Fed budgeted for the project, and said other Fed staff were contributing as needed.

MM. Rosengren and Williams said that many of the benefits of a Fedcoin are already largely part of a new payment and transfer system for banks called FedNow, which is expected to launch in 2023. The service aims to provide rapid movement of money. money for banks, which these institutions could then use to speed up the existing money transfer system.

The Fed has legal issues to sort out before launching a Fedcoin. Security could be a particular obstacle. Mr. Powell noted that China’s digital offering gives the state full visibility into user accounts.

“The idea of ​​having a ledger where you know everyone’s payments is not something that would be particularly appealing in the American context,” he said last year.

At the same time, the Fed will have to design any digital dollar in such a way that it does not create unforeseen risks for the financial system.

Mr Powell said in March that the Fed would not pursue the plan without congressional support, ideally through an authorization bill.

A digital Fed dollar wouldn’t mean the end of cash, which Fed officials say continues to be very popular.

Write to Michael S. Derby at [email protected]

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