By Jonnelle Marte and Michelle Price

(Reuters) – The U.S. Federal Reserve board will soon issue a hotly-awaited report exploring the potential adoption of a digital dollar, but with its governors and other policymakers divided on the issue – and with so much at stake for the financial industry – the central bank will likely tread carefully.

Central banks in Europe, China and Europe have begun to explore issuing their digital currencies. Fed officials are under increasing pressure to get ahead.

Unlike cryptocurrencies which are typically run by private actors, or the electronic money used in billions of transactions daily that is mostly created by commercial banks, some CBDCs would be equivalent to cash, issued and backed by central banks https://www.reuters.com/article/ctech-us-cenbanks-digital-explainer-idCAKBN2CE1SP-OCATC.

CBDCs could also be made available for wholesale, allowing corporations to make cross-border payments faster and at a lower cost. They can also speed up the settlements of stock and bond transactions. An American retail dollar can be made available to the public. This will allow them greater access and flexibility in their financial services.

A U.S. CBDC could also pose a threat to the stability and security of the banking system. It would also raise privacy, security, cost, and political concerns. This comes at a time when Fed Chair Jerome Powell seeks a second term, despite opposition from progressive politicians.

David Beckworth is a senior Mercatus Center researcher and an ex-Treasury economist. Beckworth said there were many political minefields around central bank digital currency, which the Fed must navigate carefully. Powell, however, was “politically clever” enough.

In May, Powell announced the Fed board would issue a report exploring payment innovations and the potential adoption of a digital dollar, separate from research the Boston Fed https://www.reuters.com/business/finance/boston-feds-first-look-digital-us-dollar-nearly-done-official-says-2021-09-29 has been working on with the Massachusetts Institute of Technology exploring the technological aspects of a CBDC.

Powell said that he remains undecided about adopting the digital dollar. “This is such an important issue, it would make sense if the product were subject to broad consultation and finally authorizing legislation by Congress,” Powell said at Tuesday’s congressional hearing.

The Fed has not yet made any decision regarding a CBDC. He tempered his expectations of the report last week. He said that the paper would address some related issues, and provide an opportunity for the central bank’s feedback to lawmakers.

Fed-watchers believe the paper will still play an important role in the shaping of the Washington debate about the future digital currency. The language in the paper will also be scrutinized carefully to determine where the board is heading, they stated.

Julia Coronado (founder of MacroPolicy Perspectives), who spoke before Congress in July about the necessity of a digital currency, said that “No matter how they speak, it’s going be a very significant setting of the tone.”

Although many expect that the Fed will highlight the dangers of the digital dollar, advocates hope the Fed will emphasize the benefits and potential uses.

Coronado said, “If it is less agnostic or more skeptical then it will not move it forward.”

The Fed’s spokesperson did not respond immediately to Coronado.

DIGITAL RIVALS

Although a widely-used digital euro, yuan or dollar may be years away, such projects could dramatically disrupt the global financial order. Washington is worried that the United States could lose its dominance in the global financial market if the US does not digitalize the dollar. The current global reserve currency, the USD.

Particularly, the United States is worried that China’s pilot digital yuan project has reached an advanced stage and has been accused of stealing a lead on a crucial innovation.

Lael Brainard, Fed Governor, stated that she found it impossible for the United States to pursue a digital currency when other economies are advancing with CBDCs. She stated in July that “that just doesn’t seem like a sustainable tomorrow.”

Others, though, are strongly skeptical https://www.reuters.com/business/quarles-says-proposals-fed-digital-currency-must-clear-high-bar-2021-06-28. Randal Quarles, the Fed’s governor, and Christopher Waller have said that digital transactions in dollars are common and the potential costs associated with adopting a CBDC may outweigh any benefits. According to three sources, the Fed staff are divided over the issue.

A few progressives believe that a digital currency can be used to lower the cost of financial services, which would help millions of Americans not currently able to access mainstream banking. The privacy and security of some members of Congress have also been questioned by Republicans.

Powerful commercial interests are in the mix too..

A digital dollar could hurt big lenders by intensifying competition for deposits, and some bank lobby groups have been pushing policymakers to move slowly. A Fed competitor could take out major dollar-linked cryptocurrency.

The U.S. Chamber of Commerce, influential CBDC supporters, and other private sector players have all been seeking a spot at the table.

Christopher Giancarlo, an ex-regulator and cofounder of the nonprofit Digital Dollar Foundation said: “I hope that the report confirms America’s great tradition of working with the public sector as policymakers continue their exploration of developing a virtual dollar.”