A Federal Reserve backed digital dollar will operate alongside digital assets like bitcoin and stablecoins, former Federal Reserve Bank of Boston President Eric Rosengren said during a virtual event on digital currencies staged by the Bretton Woods Committee Tuesday morning.
The Boston Fed is currently collaborating with the Massachusetts Institute of Technology’s Digital Currency Initiative to study whether the U.S. should issue a central bank digital currency, or CBDC, and if so, how it should be done.
Rosengren said the Boston Fed and MIT are “making very good progress” toward developing a digital version of the Federal Reserve Bank notes Americans use for every day cash transactions and that tests of the technology show that it will allow for extremely fast settlement of transactions. “The technology for the core processing is there,” Rosengren said.
The Fed is expected to release a report on a potential digital dollar in the coming weeks.
“That is not to say that [we have] a fully developed digital currency,” Rosengren added. “There’s still significant work that needs to be done on privacy and resilience on security, and as those various issues are tackled, it’s likely to slow both the throughput and possibly the transaction speed, and obviously we haven’t had the policy discussion in Washington yet.”
Rosengren added that the policy debate over the exact nature of a central bank digital currency, what sort of privacy and security features it has, how it would incorporate the existing retail banking industry and other regulatory questions will take much more time to resolve.
“I think it’s really important that we move the technology along so that whenever that policy discussion is done, that we have the capability to launch.” he said. “But until the policy discussion has been fully developed, I think it’s going to be very difficult to predict when or if [central bank] digital currency will come to the United States.”
The former Fed official argued that when the central bank does eventually issue a digital form of the U.S. dollar, it will likely coexist alongside cryptocurrencies like bitcoin
as well as stablecoins, or digital assets that seek to maintain a steady value relative to the dollar.
Rosengren said bitcoin’s future is likely as an alternative asset class that is “less correlated with other financial assets” and not as a payments mechanism, because of its volatility and the time and energy it takes to settle transactions in bitcoin. He also said that he doesn’t see digital dollars as a replacement for stablecoins like Tether
or USD Coin
which he predicts will continue to be used to facilitate transactions between various digital assets.
He said he agrees with the Biden administration’s desire to more strictly regulate stablecoins given potential financial stability concerns. Fed Chairman Jerome Powell, Treasury Secretary Janet Yellen and other regulators have called for aggressive action in regulating stablecoins. The President’s Working Group on Financial Markets is expected to release a report recommending a regulatory framework some time this month.
Rosengren predicted if the U.S. ultimately rolls out a central-bank issued digital currency that would play a significant role in retail payments.
“It’s really a substitute for cash, but in its digital form,” he said. “It’s a payment system with the finality of cash, you make the transfer and the transfer is done. You don’t worry about anything else.”
Rosengren, 64-year-old, retired from the Fed last week, about nine months early, citing health reasons. Rosengren said he had qualified for a kidney transplant to deal with a long-running condition.
His retirement also came as Federal Reserve Bank of Dallas Robert Kaplan retired on Oct. 8.
The retirement of both Rosengren and Kaplan followed recent disclosures that both had traded stocks and other investments while also helping to set monetary policy.