However, The Fed Is Only Emphasizing The Pros And Cons Of State-Backed Digital Currency, While Still Taking A Neutral Position About Creating A CBDC

The United States is still cautious about entering the crypto sector or banning it whatsoever, but during recent months several authorities published reports on possible use cases, pros, and cons to digital currencies.

The latest report is from the United States Federal Reserve and it is called “Money and Payments: The U.S. Dollar in the Age of Digital Transformation”. According to the paper, the financial authority recognizes that innovation in the banking and payment settlement space periodically takes place, while blockchain technology and digital currencies can offer such innovation. Furthermore, the report brings clarity on state-owned digital currency, the benefits it introduces, and the drawbacks that come with it, as well as how the new technology can improve the banking and payment settlement world.

Meanwhile, the Federal Reserve acknowledged the fact that over five percent of U.S. households are remaining unbanked, while “nearly 20 percent more have bank accounts, but still rely on more costly financial services such as money orders, check-cashing services, and payday loans.”

Furthermore, in the area of cross-border payments, the Fed notes that remittance often comes with high transaction fees and slow payment settlement times due to timezone differences and human interaction.

“As of the second quarter of 2021, the average cost of sending a remittance from the United States to other countries was 5.41 percent of the notional value of the transaction. These high costs have a significant impact on households that make remittance transactions. Reducing these costs could benefit economic growth, enhance global commerce, improve international remittances, and reduce inequality,” the Fed added.

This is where digital currencies come into play, as they may offer nearly instantaneous payment settlement time and low transaction fees. The characteristics of digital currencies pushed the Fed to assume them as a monetary tool that could reduce the amount of unbanked or underbanked people in America, since “a U.S. CBDC would offer the general public broad access to digital money that is free from credit risk and liquidity risk.”

However, implementing a U.S. CBDC does come with its own set of obstacles, namely that a new form of money would be entering the economy, which would alter the structure of the banking and the payment settlement system. Furthermore, a CBDC might make banks run more severe, “could reduce the availability of credit in the financial markets, and that it has the potential to disrupt the current concentration of economic power.”

The report states that U.S. authorities have blockchain and digital currency on their radar, but further development would only come when there is enough proof that the new technologies are beneficial. Blockchain and CBDCs, according to the report, should be implemented into the banking and payments system, when there is little to no risk of them running under a governmental structure.

Despite the report, the crypto market dropped yet again, wiping out several days of upwards momentum. Bitcoin, for example, tumbled down almost two percent and is still way below the $40,000 resistance zone. Ethereum, as well as the other top-performing cryptos, followed suit to lose anywhere between 1% and 5%.

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