The US central bank is considering a wide array of concerns about regulations and safety nets for virtual payments and currencies, including costs and potential advantages of creating its own electronic money.
According to Federal Reserve Governor Lael Brainard, by revising payment systems, going digital has the "potential to deliver greater value and convenience at lower cost." Brainard delivered his statement Wednesday at the Stanford Graduate School of Business.
However, the digitalization comes with many risks, Brainard said in a partial counterstroke of her own and other major investors' fears about the fast application of digital currencies and private electronic payment systems, including Facebook's Libra project.
Brainard pointed out that some of the new digital currency advocates are outside the financial system's regulatory perimeters, and their new currencies could pose serious obstacles in key areas like illicit finance, privacy, and financial transmission.
Major financial institutions are at loggerheads as to how to effectively deal and manage electronic finance, including the distributed ledger Blockchain that form the backbone of bitcoin, which promises fast real-time payment processing at very low cost.
Brainard emphasized that the Federal Reserve is in the thick of things studying the creation of its own virtual currency payment system, including the review on 200 comment letters on the project.
The Fed official said they are conducting "extensive experimentation" related to distributed ledger technologies and their potential use for virtual currencies, including the potential for the creation of a central bank digital currency, or CBDC.
Brainard's statements indicate the central bank is taking a deeper scrutiny at electronic currency after its initial warning on the matter. The IMF and Bank for International Settlements called on central banks to research the the possibility of bitcoins as private-sector firms experiment with competing foreign exchange units.
A recent international study showed that hundreds of central banks around the world are also engaged in this research, with China moving ahead on its program to launch a stablecoin.
In the United States, concerns that need to be addressed include whether a virtual money system can make the payments online simpler, and whether it could pose financial stability threats, including the likelihood of bank runs if money can be converted into digital currency with a "single swipe."
As the People's Bank of China and the European Central Bank have already started working on their own CBDCs, the US Federal Reserve is just slightly behind the curve.
This, though, is one of the first times the American central bank has admitted it is possible. Before, they just said that they were researching and looking into stablecoins and nothing more.
