The digital dollar will eliminate the need for other digital currencies: US Fed Chairman

  • Fed Chairman Jerome Powell says a digital dollar would undercut other digital assets
  • He also acknowledged the need to better regulate stablecoins to prevent ‘fragmentation’ in the payments system

Federal Reserve Chairman Jerome Powell believes that a digital dollar would eliminate the need for other digital currencies. He made these comments while addressing the United States House of Representatives Financial Services Committee on Wednesday. He presented this as a reason for the U.S Central Bank to issue a digital currency. When asked if a central bank-issued digital currency would be a more viable option to cryptocurrencies and stablecoins, Powell responded,

I think that may be the case and I think that’s one of the arguments that are offered in favor of digital currency. That, in particular, you wouldn’t need stablecoins, you wouldn’t need cryptocurrencies if you had a digital U.S. currency – I think that’s one of the stronger arguments in its favor.

Powell also revealed that the Fed would soon release a paper discussing the potential merits and demerits of a CBDC.

The need for better regulation of stablecoins

Speaking on stablecoins, Powell stressed that if they are to be part of the payment system, there is a need for stricter regulation. Tether, currently the most valuable stablecoin and third-largest cryptocurrency by market value was brought up by Rep. Anthony Gonzalez. It had previously been asserted that each coin was backed by a single dollar. It has since been revealed that Tether is backed largely by commercial paper or debts.

In response, Powell remarked that usually, such assets were very liquid but that had changed during the recent financial crisis. He likened stablecoins to bank deposits and money market funds, adding that they needed to be treated as such.

We have a pretty strong regulatory framework around bank deposits, for example, or money market funds. That doesn’t exist currently for stablecoins, and if they’re going to be a significant part of the payments universe – which we don’t think crypto assets will be but stablecoins might be – then we need an appropriate regulatory framework

His comments were in tandem with those of Federal Reserve Governor Lael Brainard who, in May, expressed concern that the increase in digital currency options could lead to a “fragmentation” of the payments system, to the detriment of many households and businesses.

Opposition from the financial elite

The idea of a digital dollar does not sit well in some circles. A digital dollar would mean a reduction and in some cases, a complete elimination of some banking fees. Banks in the United States make about $17 trillion from deposits and billions from overdraft and account maintenance fees per year. A CBDC would be a threat to their business.

Greg Baer, head of the Bank Policy Institute has warned that businesses and individuals would find it more difficult and expensive to access loans should the central bank be given such “extraordinary power”.

Another expert, Professor Eswar Prasad of Cornell University, who is set to release a book on digital currencies in September theorized that in case of a financial meltdown similar to that of 2008, the digital currency might “actually make matters worse”.

Meanwhile, Powell also addressed concerns regarding rising inflation rates, maintaining his view that this was a temporary situation. According to the Fed chairman, inflation will return to pre-pandemic levels once some markets return to their normal conditions.

Related: Bulls in agony as Bitcoin slips below $32K but new CPI report reveals US economy is strained

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Tukiya is an IT Student with a newly found interest in blockchain technology and its potential applications in everyday life.

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