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Crypto: Fed releases white paper on a central bank digital currency

Yahoo Finance's Jennifer Schonberger details the Fed's long-awaited white paper on a central bank digital currency.

Video transcript

ALEXIS CHRISTOFOROUS: We've got some breaking news to share for you now regarding the Federal Reserve-- out with its long-awaited white paper just moments ago laying out the pros and cons of a central bank digital currency. For more, let's go to Yahoo Finance's Jennifer Schonberger. So, Jen, I'm wondering if Bitcoin has to worry about some new competition anytime soon from the Fed.

JENNIFER SCHONBERGER: Hey there, Alexis. Yeah, that's right, the Federal Reserve out with its long-awaited paper detailing the pros and cons for a central bank digital currency. The Federal Reserve does not come to a conclusion on the digital dollar but has a long list of benefits and risks. Among the pros for adopting a central bank digital currency, it would support faster and cheaper payments, including cross-border payments.

It would expand consumer access to the financial system, particularly for lower income Americans, and would preserve the status of the US dollar as a global bank reserve currency. Now, on the risks side, banks rely a lot on deposits. And adopting a central bank digital currency would actually lower the amount of deposits at banks. And that could, in turn, increase the costs for banks, which could increase credit costs for households and businesses.

A CBDC could also create runs for financial firms and make them more likely or more severe. And in the long term, the Fed could have to increase the size of its balance sheet to accommodate a central bank digital currency just as it increases the size of physical currency. Now, if adopted, a central bank digital currency would, of course, need to protect consumer privacy while also guarding against money laundering and any other criminal activity.

And it would need to be a seamless transfer between parties. The Fed views this as less risky than other cryptocurrencies-- private cryptocurrencies, I should say-- and stablecoins. Though, of course, Federal Reserve Chairman Jay Powell has said that the private sector stablecoins could exist with a central bank digital currency.

The Fed is not committed to how it's actually going to execute this, whether it would use blockchain or would have a ledger. Currently, paper money, the fiat currency, does not have a ledger. Also unclear about where those accounts would be housed. The central bank does not house individual accounts right now. That's done by banks. So likely would include banks or intermediaries.

At this point, the next step is for the Fed to put this out for comment. They will do so for about 120 days and gather everyone's responses. And if they do decide to move forward with a central bank digital currency, they would need authorization from Congress. Alexis.

ALEXIS CHRISTOFOROUS: All right, thanks a lot for pulling that together, Jen Schonberger.

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