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NEW YORK — Digital money, a curiosity just a few years ago, is emerging as an intense central bank concern with the potential to erode the power of monetary policy, and even in a brave new world likely to make more difficult to control interest rates, according to the new Federal Reserve and other research.

A New York Fed symposium this week laid out the headache central bankers face in the face of emerging digital technologies that range from new ways to process payments to new asset classes like cryptocurrencies and coins. stable.

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The underlying technology has benefits including better transaction speed, lower cost and easier access to banking services, and even with the recent crashes and volatility it is assumed to continue to progress. In other words, if you ignore it, systems developed by fledgling private companies could capture more funding and make “central bank liquidity” less relevant, reducing central bank control. on interest rates.

Create a substitute in the form of a central bank digital currency, and new instabilities could emerge – including the possibility that a digital dollar or euro will replace conventional bank deposits and compete with money market and cash market funds. other key financial instruments. In a crisis, the process could mimic a bank run, leaving the system starved for cash and forcing the Fed, for example, either to increase lending to commercial banks or to bolster its own holdings of Treasuries and similar securities to keep the system stable.

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Banks losing deposits are expected to compete for new deposits and “depending on the intensity…the general level of short-term interest rates…could rise” as a result, a Fed article concluded this week https://www outlining the possible outcomes if the US central bank adopted a retail-level digital currency, open to households. “A retail CBDC could amplify stress on the financial sector, forcing the Federal Reserve to provide more liquidity to banks through existing tools… The longer-term footprint of the Federal Reserve in certain asset markets, such as US Treasuries, could become more pronounced.”

The Fed is debating whether to develop a digital currency, as most central banks around the world are doing. No decision has been made and officials say it would require congressional approval to move forward.

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The point of tension may seem remote since the market value of cryptocurrencies and stablecoins remains a small slice of the financial system. But payment processors, such as PayPal and Apple Pay, are growing rapidly and as of early this year were processing transactions across major credit card companies. Among cryptocurrencies and stablecoins, it was noted at the New York conference, some of the deals involve exotic lending schemes – credit creation – which, if extended, could lead to greater risks. .

“What if the central bank has no more relevant money, whether at the retail or wholesale level? In this case, the central bank could start to lose ground,” said Eswar Prasad, a professor at Cornell University and author of the recent book “The Future of Money” on the subject, in his monetary policy, on the sidelines of the conference.

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“In some countries it is becoming a problem today. China, increasingly India or Sweden – the use of central bank money in retail payments has dipped to virtually nothing,” as private payments providers stepped in.


The implications of central bank digital currencies for monetary policy are only part of a broader look by institutions like the Fed at how emerging technologies will change the financial system. As these technologies have become more prominent, the implications for financial stability and the risks posed to individual investors have become a higher priority for research and regulation.

In the United States, President Joe Biden, citing the five-year growth of crypto assets from $14 billion to $3 trillion in November, issued an executive order in March detailing the Treasury and other agencies to start looking for the best way to regulate the industry. .

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Given the stakes, central banks around the world are rapidly moving away from the sidelines.

A survey by the Bank for International Settlements released last month of 81 central banks in countries that account for nearly all of the world’s economic output found that over 90% were exploring the idea of ​​a central bank digital currency.

More than a quarter are actively developing a digital currency or running pilot programs, a share that has nearly doubled from 2020 to 2021. The explosion of electronic payments as well as crypto investments during the pandemic is accelerating the work, said the respondents, with around 60% of banks stating that cash usage is decreasing.

Adoption is not necessarily disruptive.

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In a presentation published innovation workshop at the New York Fed conference, Andrew Hauser, executive director of markets at the Bank of England, said that “while the technology of any future CBDC may be new… the use of the balance sheet of the central bank to provide state-backed funds transaction money…is one of the oldest functions of central banks.

But it could happen quickly.

“Innovation occurring in money and payments has the potential to alter the existing monetary system upon which current monetary policy implementation frameworks are designed,” said Lorie Logan, executive vice president of the New York Fed and recently named head of the Dallas Fed. “How things evolve from here is uncertain, and the impact of these innovations could be revolutionary, or more evolutionary.” (Reporting by Howard Schneider; Editing by Andrea Ricci)



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