America’s central bank the Federal Reserve, or Fed, has plans for a Digital Dollar. Fed Chair Jay Powell confirms the Federal Reserve is investigating the creation of a central bank digital currency, or CBDC, in a 20 May 2021 video.
“For the past several years, the Federal Reserve has been exploring the potential benefits and risks of CBDCs from a variety of angles, including through technological research and experimentation,” Powell reveals. Unfortunately, Powell did not reveal any details of the “technological research and experimentation.”
“Our key focus is on whether and how a CBDC could improve on an already safe, effective, dynamic, and efficient U.S. domestic payments system,” Powell said. “We think it is important that any potential CBDC could serve as a complement to, and not a replacement of, cash and current private-sector digital forms of the dollar, such as deposits at commercial banks.”*
Fed plans US central bank digital currency
I think Powell views a CBDC as a compliment to the paper dollar and the unofficial digital dollars in the present banking system.
The difference between the CBDC and current digital versions of the dollar is that the Fed itself will create the Digital Dollar. Thus, the Federal Reserve will control the supply of a U.S. central bank digital currency.
Another advantage to a CBDC is that it could create a digital payment mechanism under the Fed’s control. Private institutions such as banks and Wall Street control existing digital payment mechanisms, such as checking accounts, funds transfers, wire transfers, stablecoins, debit cards, and credit cards.
Why the Fed Wants a CBDC
The Federal Reserve’s mission is to control America’s money supply. The Fed cannot control the money supply if private companies control the payments system. However, blockchain could give the Fed control over the payments system.
For instance, Fed engineers could build a Federal Reserve Cryptocurrency that contains a digital kill switch that allows Fed officials to destroy the currency. Hence, the Fed could shut off payments to prevent runs or panics.
Notably, Powell mentioned the dangers from stablecoins in his video. A stablecoin is a cryptocurrency that contains a digital robot. The digital robot, or smart contract, issues payment in a fiat currency such as the US dollar, when you spend the stablecoin.
The stablecoin issuer holds the fiat currency in a reserve account. I think Powell fears some stablecoin issuers do not have enough fiat currency to back the stablecoins they are issuing. Powell’s fear is that if a popular stablecoin such as Tether (USDT) lacks the dollars to back all the coins it is issuing the Fed will have to step in and back it to prevent collapse and crisis.
One use for a CBDC will be to give the Fed a cryptocurrency it can send to stablecoin holders if the stablecoin itself runs out of dollars. IE, the Fed could send every Tether owner an Ethereum Fed Coin if Tether’s reserve accounts are empty. Thus, the Fed could prevent a stablecoin collapse that could trigger a financial panic.
Moreover, the Fed could build a digital wallet and blockchain payment system to send Fed Coin straight to ordinary people. Hence, the Fed could distribute a Basic Income, Child Cash, stimulus payments, or helicopter cash straight to ordinary Americans’ smartphones.
If there was a financial crisis, the Fed could use the CBDC to help ordinary people buy groceries or pay rent and utilities. Ordinary people could accept the Fed Coins because they could convert them to cash through ATMs or cash registers at retail stores. Thus, we could avoid mass hysteria, bank runs, civil unrest, and needless suffering during a financial crisis.
Are you Ready for Fed Coin?
However, Powell does not say if the Fed has a design for a CBDC. Yet, the Chair is preparing the public for a Fed Coin.
“The design of a CBDC would raise important monetary policy, financial stability, consumer protection, legal, and privacy considerations and will require careful thought and analysis including input from the public and elected officials.,” Powell says.
Therefore, I think the Fed does not have a final design for a CBDC. Instead, I think the Fed, or contractors, could already have the technology for a CBDC. Now Powell is floating the idea to see what the political reaction will be.
Notably, I think the Bancor (BNT) cryptocurrency and Block.one; the organization behind the EOS (EOS) cryptocurrency, could be fronts for the Fed. To explain, EOS, or Bancor, could test the technology the Fed needs to build a CBDC without attracting media attention or political attacks.
Is the Federal Reserve Cryptocurrency Coming this fall?
“To help stimulate broad conversation, the Federal Reserve Board will issue a discussion paper this summer outlining our current thinking on digital payments, with a particular focus on the benefits and risks associated with CBDC in the U.S. context,” Powell said on 20 May 2021.
I think the “discussion paper” will be the whitepaper for a Fed Coin or Digital Dollar. To explain, when cryptocurrency developers issue a new coin they write a white paper.
A whitepaper is a description of the cryptocurrency and the technology behind it. One use of the whitepaper is to market the cryptocurrency to speculators and investors.
A beta test of the cryptocurrency usually follows the whitepaper. A beta test is a third round of testing of a new product before they release it to a wide market. Thus, speculators and financial industry pros will start watching for the Federal Reserve CBDC.
How the Federal CBDC will work
Thus we could see a beta test of the Fed’s CBDC this Fall. For example, the Fed could conduct a beta test of its stablecoin at regional banks and on cryptocurrency exchanges. The Fed could also conduct a CBDC test with PayPal (PYPL) and Coinbase (NASDAQ: COIN).
For instance, the Fed Coin could first appear in Coinbase’s cryptocurrency wallet. If the Federal Reserve cryptocurrency works at Coingbase, they will roll it out through PayPal (PYPL) and Square’s (SQ) Cash app.
I think the CBDC will be a Federal Reserve Stablecoin. The Digital Dollar will contain a smart contract that releases payment from the Federal reserve. There will be an enormous demand for the Digital Dollar because the Fed will back it with US dollars. Remember, the Fed can issue all the dollars it wants, so a dollar will always back a Fed Coin.
The US Dollar is the world’s reserve currency, the fiat currency other central banks make transactions in. Speculators will buy the Digital Dollar for currency speculation.
Investors will use the Digital Dollar as a hedge against inflation or instability of foreign currencies such as the Brazilian Real. Businesses will use the Digital Dollar transactions to pay employees working in foreign countries, for instance.
Consumers will use the Digital Dollar to pay for goods and services. A Bolivian could use the Digital Dollar to pay for her Amazon (AMZN) order, for instance. Hence, many companies accept Digital Dollar payments through their e-commerce platforms. You could Fed Coin to pay for your Amazon order and your Netflix (NFLX) subscription.
Consequently, I think there will be an enormous demand for a Digital Dollar Notably, the 24-Hour Market Volume for Tether (USDT); the most popular stablecoin, was $163.98 billion on 22 May 2021 . In contrast, the most popular cryptocurrency had a 24-Hour Market Volume of $76.094 billion on the same day, Coinmarketcap estimates.
The 24-Hour Market Volume shows how many digital coins people spend in a day. Hence, the 24-Hour Market Volume shows many people actually use a cryptocurrency.
I predict one probable outcome of the Digital Dollar’s appearance will be to kill Tether and other USD stablecoins. To explain, I think nobody will spend money on stablecoins issued by shadowy startups – if you can buy a Stablecoin the Federal Reserve issues.
Is Diem a Front for the Federal Reserve?
A potential front for the Federal Reserve’s CBDC effort could Facebook’s (FB) Diem stablecoin scheme.
Facebook has rebranded its controversial Libra cryptocurrency scheme as Diem and is moving the project to the USA, CNBC reports. In particular, the Diem Association has withdrawn its application for a Swiss payment license. Notably, Diem announced its move to the USA, on 12 May 2021, nine days before Powell announced the discussion paper.
Instead, Facebook and Silvergate Bank, a California state-chartered bank will issue a Diem stablecoin in the United States. Libra was originally a stablecoin backed by a basket of major currencies. However, Libra fell apart when several companies; including PayPal (PYPL) and Visa (V), fled the project after criticism.
I think the Diem Coins will be stablecoins backed by fiat currency. Since they will base the Diem Association in the US, the Diem could be a US dollar backed stablecoin. I have to wonder if Diem is a stealth Beta test for a Federal Reserve CBDC.
Notable Diem Association members include Coinbase (CB), Lyft (LYFT), Spotify (SPOT), Shopify (SHOP), Uber (UBER), PayU, and the lender Kiva. Thus the Federal Reserve could beta test a CBDC through Uber, Lyft, Coinbase, Shopify, and Spotify’s platforms before rolling it out to the public.
Speculators need to watch Diem carefully because it could be a front for the Fed.
America could have a Digital Dollar soon
Speculators need to watch for the Digital Dollar because it will be most popular and disruptive stablecoin of all.
Notably, I think the Federal Reserve CBDC could be the mechanism that drives the mass adoption of cryptocurrency. Hence, a Federal CBDC could be a brilliant investment.
*https://www.federalreserve.gov/mediacenter/files/payment-innovation-message-transcript-20210520.pdf
Originally published at https://marketmadhouse.com on May 24, 2021
