By Michael S. Derby
It is time to start thinking about Fedcoin.
For years central bankers have seen digital currencies as a
curiosity to keep an eye on. But now they are increasingly looking
at whether they should create their own.
"It's really very premature to be talking about the Federal
Reserve offering digital currencies, but it is something we are
thinking about," New York President William Dudley said on
Wednesday.
Mr. Dudley was speaking in the shadow of bitcoin, an electronic
form of money that has soared in value this year, fueling an
investment mania. Bitcoin is created privately, unlike national
currencies such as the U.S. dollar and British pound that are
issued by governments, typically through their central banks.
Since central banks rely on their control of the money supply to
guide their economies and electronic payment methods are rising in
popularity, officials have begun pondering whether they might need
to get in the game.
The Fed and its foreign counterparts already create money
electronically, working directly through private banks, which in
turn loan money electronically to businesses, households and
others. But the U.S. government also turns some of that into paper
dollars and metal coins. The Fed issues no separate currency that
exists only on the internet, without any tangible cash form.
Fed officials have long held that bitcoin is no rival for the
dollar, and they don't see that changing. So far, it is neither
stable in value nor universally accepted as a form of payment.
Imagine trying to find a barber, for example, who accepts bitcoin
and could reliably price the trim when the currency's value
oscillated wildly.
But change is in the air. Some central banks, such as Sweden's
Riksbank, are weighing the creation of their own versions of
digital currencies.
San Francisco Fed President John Williams said Wednesday the
topic of a central bank-issued digital currency would be "a very
exciting area" of research over the next decade.
Academics have already been laying the intellectual groundwork
for official digital money.
Central bank-issued digital money "can serve as a practically
costless medium of exchange, secure store of value, and stable unit
of account," wrote economics professors Michael Bordo of Rutgers
University and Andrew Levin of Dartmouth College in a paper
published earlier this year.
They say central bank-issued digital money would be painless for
those who want to use it. It could be accessed via accounts
directly at the Fed, or more likely, from private banks in
partnership with the central bank. The accounts would earn
interest, which would allow the Fed to conduct monetary policy
through interest-rate changes right at the consumer level,
replicating the tools the central bank now uses via banks and money
managers.
Fed-issued digital money would also make payments fast and
costless, removing the wait for money to clear into an account, or
fees to move cash around.
"It's urgent for the Federal Reserve to move forward" on this
matter, Mr. Levin said in an interview Friday. Given that it would,
in many ways, be an extension of how the Fed already operates,
implementation need not be that onerous, he said.
Key Fed officials don't share that urgency. Governor Jerome
Powell, whom President Donald Trump has nominated to become Fed
chairman, said in June about Fed-issued digital money: "My approach
to that would be very, very cautious."
The Fed's regulatory leader, Randal Quarles, is on that same
page. In remarks Thursday, he said there are a host of legal,
technological and privacy issues that must be addressed before
anything can move forward.
"I am particularly concerned that a central-bank-issued digital
currency that's held widely around the globe could be the subject
of serious cyberattacks and could be widely used in money
laundering and terrorist financing," Mr. Quarles said. It is also
possible a central bank system could complicate the ability of
banks to make loans and upend private efforts to create more
efficient payment systems, he said.
Mr. Quarles sees a more narrow path as likely. He called for
more research into "limited-purpose" digital money that could, for
example, be used to help settle transactions between banks.
There are also privacy worries. People and companies might not
want to bank directly with a government arm such as the Fed if
offered the chance.
There is also the fact that, for many Americans, cash remains
king. The rise of phone-based payment systems and merchants who are
willing to take cards for small-scale purchases haven't made much
of a dent, according to data compiled by several regional Fed
banks. Cash remains popular for small transactions, and if there is
anything moving people away from cash, it is the shift from
brick-and-mortar shopping to online purchases, the report
noted.
Mr. Dudley noted another impediment to U.S. government-backed
digital dollars: compared with people in other developed economies,
many Americans don't even have bank accounts.
Write to Michael S. Derby at michael.derby@wsj.com
(END) Dow Jones Newswires
December 03, 2017 11:14 ET (16:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.