Fed chair Powell floats central bank digital currency and more regulation of cryptocurrencies

The Federal Reserve will be releasing a discussion paper on digital payments and the creation of a US central bank digital currency.
Written by Jonathan Greig, Contributor

Federal Reserve Board Chair Jerome Powell released a lengthy video and statement on Thursday announcing that the Federal Reserve will get more involved in cryptocurrency and may even create its own digital currency down the road. 

Alongside further research into cryptocurrencies, Powell said the Federal Reserve will be releasing a discussion paper this summer that will "explore the implications of fast-evolving technology for digital payments, with a particular focus on the possibility of issuing a US central bank digital currency."

"As the central bank of the United States, the Federal Reserve is charged with promoting monetary and financial stability and the safety and efficiency of the payment system," Powell said on Thursday.

"To date, cryptocurrencies have not served as a convenient way to make payments, given, among other factors, their swings in value. Nonetheless, coins tied to the value of the dollar or another currency -- known as 'stablecoins' -- have emerged as a new way to make payments."

He said that the use of stablecoins can eventually become a way to "enhance payments efficiency, speed up settlement flows, and reduce end-user costs."

But he went on to cite the technology's risks as a reason why the Federal Reserve is approaching digital coins cautiously. Even stablecoins tied to the value of the dollar may not come with the "same protections as traditional means of payment, such as physical currency or the deposits in your bank account," Powell added. 

Must read:

Despite the risks, Powell said the Federal Reserve is exploring the ability of central banks to create central bank digital currencies for use by the general public. 

"We think it is important that any potential central bank digital currency could serve as a complement to, and not a replacement of, cash and current private-sector digital forms of the dollar, such as deposits at commercial banks," Powell said. "The design of a CBDC would raise important monetary policy, financial stability, consumer protection, legal, and privacy considerations and will require careful thought and analysis—including input from the public and elected officials."

The Federal Reserve is already looking into a variety of regulatory and oversight frameworks as the use of stablecoins increases, Powell said. 

While no country has launched an official central bank digital currency of its own, many have kickstarted pilot programs or research into the concept. The Bank of England has spent years working on the idea and central banks in Sweden, Russia, Singapore, China, Thailand, Canada, Venezuela, and Uruguay are all at varying stages of testing out their own digital currencies. 

Cryptocurrency and IT expert Jeff Steuart attributed the timing of Powell's statement to China's issuance of their central bank digital currency, e-CNY, earlier this year. Steuart said central bank issued e-currencies give the issuers unprecedented control over the timing and distribution of wealth across those participating in the system.  

"Considering that the US government alone is said to have spent $6.5 trillion in 2020 and the presence of 14 billion phones in the world at that time, the ability to electronically route spending directly to those in 'need' is just too attractive a proposition," he said. 

"Specifically, the fear may center around e-currency as a means for the Chinese or other significant economies to gain a significant foothold in the e-currency landscape, and thereby control that sector of the economy, before the US can do so. This possibility may have DC highly concerned. China's e-yuan can in theory be closely controlled by the government, to the point where 'time of life' is shortened, forcing holders to spend their currency rapidly before it expires or begins to erode value and thereby pumping the economy, or cancelling the worth of the currency as a form of punishment or control, etc."

Steuart added that China spends vast sums of money on foreign aid and by moving that foreign aid in the form of e-yuan, the US dollar may eventually be displaced as a globally dominant currency. Outside of the geopolitical gamesmanship underpinning the Federal Reserve's desire for an e-currency, Steuart noted that it would allow them to control the amount of "value" in the system, who has it and also the speed with which the money moves through the system. 

But these kind of systems are the exact opposite of the cryptocurrencies currently being traded or bought like Bitcoin and Ethereum. Investment cryptocurrencies, Steuart said, are decentralized systems specifically designed to prevent governments from controlling their issuance or valuation.  

In his statement, Powell noted that the lack of regulation in the cryptocurrency industry has led to some "private-sector payments innovators" not operating "within the traditional regulatory arrangements applied to banks, investment firms, and other financial intermediaries."

The statement comes as the White House rolled out a new set of tax compliance initiatives that includes more funding for the IRS to focus on the growth of cryptoassets.

The American Families Plan Tax Compliance Agenda includes sections that say the IRS has identified cryptocurrency transactions "as an enforcement priority" and recently "included cryptocurrency reporting on the individual tax return, Form 1040."

Businesses that receive any cryptoassets with a "fair market value" of more than $10,000 must report it on their taxes.

Editorial standards