A Crypto U.S. Dollar Could Boost Global Reserve Status of Traditional Greenbacks, Says New Fed Report

The Fed is seeking input on the concept of a blockchain-based U.S. dollar through May 20.

Last Thursday, Jan. 20, the U.S. Federal Reserve issued its long-awaited discussion paper that lays out the debate for whether the U.S. should consider deploying its own cryptocurrency in the form of a central bank digital currency (CBDC).

What is a CBDC?

A CBDC refers to the virtual form of fiat money built on a private blockchain that's run or authorized by a government in support of its country's official currency. CBDCs are generally regulated and issued by a country's central bank or governing monetary agency. Since CBDCs are created by their respective country, they are also backed by the full faith and credit of that issuing government.

Would a U.S. government crypto dollar be safe for everyday use?

The Fed’s 40-page report titled "Money and Payments: The U.S. Dollar in the Age of Digital Transformation" looks at the pros and cons of CBDCs, different characteristics with which they can be programmed, their variety of uses, and more.

Salman Banaei, head of public policy, North America, for blockchain data platform Chainalysis shared in an email exchange with me that he believes a U.S. CBDC would be a safe way for consumers to try blockchain-based currencies.

"This is because it represents a liability on the Fed's balance sheet vs. a commercial bank's balance sheet. As such, it would be the most desirable form of holding cash, especially during periods of market turbulence where a bank or other financial institution's creditworthiness might be called into question. A commercial bank-issued stablecoin in contrast would be a riskier proposition," Banaei stated.

A U.S. CBDC could boost global reserve status to the U.S. dollar

Beyond safety, another compelling use case of a U.S. CBDC laid out in the report would be the positive potential impact it could have on the traditional U.S. dollar, as outlined in this excerpt from the paper:

"The dollar is the world's most widely used currency for payments and investments; it also serves as the world's reserve currency. The dollar's international role benefits the United States by, among other things, lowering transaction and borrowing costs for U.S. households, businesses, and government. The dollar's international role also allows the United States to influence standards for the global monetary system.

Today, the dollar is widely used across the globe because of the depth and liquidity of U.S. financial markets, the size and openness of the U.S. economy, and international trust in U.S. institutions and rule of law. It is important, however, to consider the implications of a potential future state in which many foreign countries and currency unions may have introduced CBDCs. Some have suggested that, if these new CBDCs were more attractive than existing forms of the U.S. dollar, global use of the dollar could decrease -- and a U.S. CBDC might help preserve the international role of the dollar."

If the U.S. ultimately launches its own CBDC, it has several levers it can pull to spur adoption domestically and abroad. For example, one way the U.S. government could drive adoption of U.S. e-dollars would be to only issue foreign aid in the form of its U.S. CBDC. A strong-arm move like that would virtually guarantee quick, universal usage since the U.S. provides aid to more than 200 countries globally.

The Fed is treading lightly regarding an official crypto dollar

However, that type of power play would be out of character as the Fed is taking a cautious approach toward the whole idea of a U.S. digital dollar at the start. The Fed repeated several times in the paper that it has no formal position yet and will only take further steps toward developing a CBDC in the context of broad public and cross-governmental support.

"The Fed is making a political decision here not to move faster than the Administration and Congress. You can imagine the backlash if they had either announced a plan to move forward with a CBDC or if they concluded a CBDC is unnecessary. They took a middle position which is politically very savvy: provide their analysis on the pluses and minuses of a CBDC alongside a preferred model for the Administration and Congress to consider," said Banaei by email response.

The Fed also stated that it wants to build that broad public support, and that it plans to conduct targeted outreach and convene public forums to foster a dialogue about the prospects of an official U.S. cryptocurrency. Additionally, it further stated in its report that it welcomes comments from all stakeholders regarding the specific 22 questions listed on pages 21-22 of the discussion paper.

If you're interested in providing your personal perspective, the Fed is looking to have any answers to its questions submitted by May 20, 2022, using this form.