Philadelphia Federal Reserve Bank President Patrick Harker said on Wednesday it is “inevitable” that central banks will issue digital currency. He also said the United States should not be the nation to lead such a move. He had been asked about the Fed’s creation of “FedNow,” its own real-time payments system. The comments were first reported by Reuters.
“Frankly I don’t think we should be the first mover as a nation to do this,” Harker said at a St. Louis community banking conference. He noted the dollar’s status as world reserve currency and underscored the need for experimentation and tests when it comes to such technology.
“It is inevitable … I think it is better for us to start getting our hands around it.”
The Federal Reserve’s real-time payments service is in progress, said Harker. “I am looking at the next five years after that. What comes next? I do think it is something around digital currency.”
Fed Chair Jerome Powell has stated that digital currencies issued by central banks probably won’t be created anytime soon.
“We’re a long way from that,” he said in June, adding that digital currency technology is still in its “infancy.” Other Fed officials say benefits of a central bank issued digital currency were “not obvious.”
Harker admitted his opinion on digital currencies and central banks was “in the minority.” His staff is researching blockchain and he plans to organize a small research conference for academics to be held early next year.
To be sure, such a digital currency might not necessarily be a cryptocurrency a la Bitcoin, Ethereum, etc. It might simply be digital, and there are many types of models that could be created under that model.
Harker’s comments come after two U.S. lawmakers asked the Federal Reserve if they were looking into creating a digital dollar.
Rep. French Hill (R-Ark.) and Rep. Bill Foster (D-Ill.) outlined concerns they have in regards to the risks to the U.S. dollar in the event another country or private company (they mention in the letter Facebook’s Libra, in which a large consortium has been in the interest of creating a global digital currency) creates a widely used digital currency.
The letter details how the Fed has the right to create and manage U.S. currency policy, as first reported by Bloomberg Law.
“The Federal Reserve, as the central bank of the United States, has the ability and the natural role to develop a national digital currency,” the Congressmen wrote.
They added: “We are concerned that the primacy of the U.S. Dollar could be in long-term jeopardy from wide adoption of digital fiat currencies. Internationally, the Bank for International Settlements conducted a study that found that over 40 countries around the world have currently developed or are looking into developing a digital currency.”
Foster and Hill wrote in the letter, which is dated September 30,2019, that cryptocurrency could “increasingly align with that of paper money in the future.” The letter specifically mentions the Facebook-led Libra stablecoin, and efforts to create digital currencies by J.P Morgan and Wells Fargo.
“The Facebook/Libra proposal, if implemented,” the congressmen wrote, “could remove important aspects of financial governance outside of U.S. jurisdiction.”
The Congressmen added: “With the potential for digital currencies to further take on the characteristics and utility of paper money, it may become increasingly imperative that the Federal Reserve take up the project of developing a U.S. dollar digital currency.”
Hill and Foster joined former Federal Deposit Insurance Corporation Chair Sheila Bair who also last year recommended the Fed look into creating a digital currency.
Federal Reserve officials commenting on digital currency is not a new phenomenon. In 2016, Federal Reserve Bank of St. Louis Vice President, Dr. David Andolfatto said Bitcoin could be used as an alternative currency that limits the government’s ability to raise money through inflation.
“In some countries, the ability for a central bank to print money is a significant source of revenue for the government,” the professor said, speaking specifically on Bitcoin. “It’s not the case in the U.S. or developed countries. But in underdeveloped countries, where you don’t have a well-developed tax system, and still a relatively large fraction of the population living in the countryside, an alternative to collecting taxes is through the inflation tax. That is, to print money”.
He cites the role Bitcoin might play in places like Zimbabwe and Venezuela. “What people do in high inflationary and hyperinflationary circumstances is seek alternative or competing currencies,” Dr. Andolfatto told Bitcoin.com. “This could be the U.S. dollar, gold and things like that. Governments and central banks often then impose currency restrictions, maybe by implementing laws keeping people from opening USD denominated bank accounts.”
He adds: “Enter Bitcoin, where any kid with a phone and access to the internet can now access this alternative cryptocurrency not under the jurisdiction of any government, because it’s accessible through the internet,” the Vice President explains. “The only way a government could really crack down on it is through draconian measures, essentially shutting down the internet in the country or confiscating everyone’s personal devices.”