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Federal Reserve reveals scope of its digital dollar research

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Yesterday, U.S. Federal Reserve Governor Lael Brainard revealed that the Fed’s research into a digital dollar includes a collaboration between the Boston Fed and the Massachusetts Institute of Technology (MIT). The multiyear project involves developing a “hypothetical” central bank digital currency (CBDC) with results to be shared, including open source code. 

Additionally, Brainard said the Fed’s Technology Lab had been building and testing different distributed ledger platforms in association with the Federal Reserves in Cleveland, Dallas and New York.

However, despite forging ahead in testing, there is no commitment to pursue the policy processes needed to launch a CBDC. This would include engaging other departments and possible stakeholders, as well as legal issues such as the potential legal tender status of a digital dollar.

“The Federal Reserve has not made a decision whether to undertake such a significant policy process, as we are taking the time and effort to understand the significant implications of digital currencies and CBDCs around the globe,” said Brainard.

The Fed’s Administrative Governor confirmed its participation in a CBDC coalition of central banks that is jointly conducting experiments. This follows the BIS Innovation Hub expanding its locations to include North America in late June.

The group are “developing potential approaches to address challenging hurdles, such as threats to cybersecurity, counterfeiting and fraud, and anti-money laundering, to name a few, as well as on shared goals, such as increasing the ease and efficiency of cross-border transactions,” said Brainard.

She highlighted the risk of a CBDC in one jurisdiction having a negative impact on other countries if it is poorly designed or is subject to a cyberattack. 

At the start of the speech, before mentioning a CBDC, Brainard referenced the importance of a trusted payment system and Coronavirus Aid. In the early days of the pandemic, there were multiple efforts to include a digital dollar in legislation for COVID-19 aid disbursement. While the lead time was impractical, other countries such as South Korea have successfully used local digital currencies for these sorts of aid disbursements.

In the last two months, both Congress and the Senate have explored a digital dollar in hearings. While the emphasis in Congress was on financial inclusion and aid disbursement, the Senate highlighted a desire to sustain the U.S. dollar’s international dominance.

Meanwhile, the private non profit Digital Dollar Project is forging ahead. Founded by the former CFTC commissioner Chris Giancarlo and collaborating with Accenture, the Project published its whitepaper in May. Some of the use case exploration could overlap with work by the Fed, but the Project is also engaging potential stakeholders through roundtable discussions.

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