The Federal Reserve Hesitant With Central-Bank-Issued Digital Currencies

On March 3, 2017, Federal Reserve Governor Jerome H. Powell spoke at the Weil, Gotshal & Manges Roundtable: “Blockchain: The Future of Finance and Capital Markets?” At the event, which was hosted by the Yale Law School Center for the Study of Corporate Law in New Haven, Powell highlighted three specific areas where blockchain technology is affecting change in regard to the Federal Reserve’s “broad public policy objectives”: the creation of real-time payment systems, use of blockchain technology for clearing and settlement services, and the issuance of digital currencies by central banks.

With respect to distributed ledger technology (DLT), Powell explained that the Federal Reserve has been making an effort to address the issue as to whether a centralized entity obtaining exclusive rights to permissioned systems undermines the “spirit of DLT.” In addition, Powell spoke on other technical details such as adopting a specific DLT, governance and risk management, and how DLT fits into the current legal framework.

Powell ended his speech by addressing the issuance of digital currencies by central banks. He stated that, although digital currency as a 21st century analog to paper currency is a “fascinating idea,” there are a number of policy issues that need to be analyzed first.

“Any central bank actively considering issuing its own digital currency would need to carefully consider the full range of the payments system and other policy issues, which do seem substantial, as well as the potential societal benefits. To my mind, they should also consider whether the private sector can substantially meet the same needs,” said Powell. “A digital currency issued by a central bank would be a global target for cyber attacks, cyber counterfeiting, and cyber theft. The threats could significantly exceed historical experience with paper currency.”

Powell admits that challenges such as global criminal activity and privacy need to be addressed, and seriously considered, before central banks should consider digital currency issuance:

 “Any central bank actively considering issuing its own digital currency would need to carefully consider the full range of the payments system and other policy issues, which do seem substantial, as well as the potential societal benefits. To my mind, they should also consider whether the private sector can substantially meet the same needs.”

Powell stated that a central-bank-issued digital currency would be counterproductive to the private-sector:

“I would expect private-sector systems to be more forward leaning than central banks in providing new features to the public through faster payments systems as they compete to attract retail customers. A central bank issued digital currency would compete with these and other innovative private-sector products and may stifle innovation over the long run.”