Powell ponders potential for digital dollar

The Fed has explored the concept of issuing a digital dollar for years, publishing research as far back as 2016

U.S. Congressman Stephen Lynch expressed concern on Wednesday over the potential effect of a central bank digital currency (CBDC), asking Federal Reserve Chairman Jerome Powell to consider the possibility of a tokenized version of the U.S. dollar to wipe out other digital assets.

Lynch’s remarks came as Powell testified before the House Financial Services Committee, fielding questions about digital assets.

I am worried about a lot of these stablecoins and other crypto currencies, Lynch said. Do they go to zero when we come up with a central bank digital currency that has the full faith and credit of the US behind it?

Powell suggested it is not clear to him why any crypto currency that is not ‘drawing on the credibility of the dollar’ such as Bitcoin or Ethereum has any value at all, regardless of a central bank digital currency’s release. He held back from commenting on how they could potentially be affected by a central bank digital currency as a result.

I have never understood the valuation of those, Powell said with regard to coins that ‘do not have any intrinsic value, but nonetheless, trade for a positive number.’

He also proposed that it is tough to determine how stablecoins would be affected, citing a lack of regulation in the U.S. that renders the reserves of some stablecoins blurred.

Stablecoins such as Tether have faced penalties in the past for making incorrect declarations about their token’s backing. And last month, Paxos said it was getting ready for a possible lawsuit from the Securities and Exchange Commission over its Binance-branded stablecoin BUSD.

Legislation that would provide a regulatory framework for stablecoins has been initiated on Capitol Hill a number of times, yet each bill so far has failed to proceed further. Last summer’s collapse of Terra’s UST, a so-called algorithmic stablecoin that maintained its value through code rather than being backed by assets, created a new urgency among lawmakers to set up rules of the road.

Eleven countries have so far launched a central bank digital currency and around 90 countries are either trialling, developing, or exploring a central bank digital currency, as per the Atlantic Council’s central bank digital currency tracker. Lynch asked Powell for an update on the Fed’s timeline for potentially releasing one too.

I cannot give you a date, Powell reacted. We engage with the public on an ongoing basis. We are also doing analysis on policy and technology.

Powell said that the Fed has not yet determined whether a central bank digital currency is an innovation that is even required in the U.S., saying the central bank is not at the ‘stage of making any real decisions.’

He detailed the development of a central bank digital currency as being in an early, experimental phase, saying the technology will take years to evaluate. Though, Powell suggested that a central bank digital currency could be quickly rolled out to the public if it is decided upon by Congress, saying  ‘I think we can get this into the hands of the public very quickly.’