Creating an official digital version of the US dollar could give Americans more, and speedier, payment options, but it would also present financial stability risks and privacy concerns, the US Federal Reserve said in a long-awaited discussion paper released on Thursday.
The paper made no policy recommendations and offered no clear signal on where the Fed stands on whether to launch a central bank digital currency (CBDC), a digital form of cash.
The Fed said it would not proceed with creating one “without clear support from the executive branch and from Congress, ideally in the form of a specific authorising law".
The paper tiptoes around a subject that has sparked debate inside the Fed's top ranks, even as other central banks across the globe are exploring the adoption of digital currencies.
Nevertheless, it sets the stage for the central bank to collect public feedback on the potential costs and benefits of a CBDC, which could ultimately advance legislation long-term.
“While a CBDC could provide a safe, digital payment option for households and businesses as the payments system continues to evolve, and may result in faster payment options between countries, there may also be downsides,” Fed officials wrote.
Challenges include maintaining financial stability and making sure the digital dollar would “complement existing means of payment”, the Fed said. The central bank also needs to tackle major policy questions such as ensuring a CBDC does not violate Americans' privacy and that the government maintains its “ability to combat illicit finance".
Unlike cryptocurrencies, which are typically run by private actors, a CBDC would be issued and backed by the central bank. It would differ from electronic transactions that happen through large commercial banks in that it could give consumers a direct claim to the central bank, similar to physical cash.
About 90 countries are exploring or launching their own CBDCs, the Atlantic Council said.
A widely used digital euro, yuan or dollar may still be years away, but the projects could dramatically disrupt the global financial system.
Despite steering clear of policy recommendations, the Fed did shed some light on how a digital dollar might function.
Critically, it said a digital dollar would “best suit” US needs if it were intermediated through the current financial system. That means people would not have CBDC accounts directly with the Fed, an approach backed by some Democrats who say a digital currency could help the unbanked. Banks worried that such an approach would eat into their deposit base.
Still, Fed officials said they are not ruling anything out.
The central bank will collect comments on the issue via an online form for 120 days.
Thursday's paper is separate from research the Boston Fed has been working on with the Massachusetts Institute of Technology to explore the technological aspects of a CBDC. That research, including coding that could be used for a potential US CBDC, will be released as early as next month.
The paper partially echoed the views of Fed Chairman Jerome Powell, who has said such a project must have broad support and ideally be mandated by Congress.
Fed Governor Lael Brainard, meanwhile, has said it is not “sustainable” for the US to hold off on pursuing a digital dollar at a time when competing economies are moving ahead.
Others, including Fed Governor Christopher Waller, are more sceptical and point out that many dollar transactions are already digital.
Jonathan McCollum, chairman of federal government relations for Davidoff Hutcher & Citron, said some in Washington worry the US could weaken its position as the holder of the global reserve currency if it does not move ahead.
“The US has the opportunity to set the rules for how digital currencies function in the international financial system, but it is critical we start now,” he said.
Who's who in Yemen conflict
Houthis: Iran-backed rebels who occupy Sanaa and run unrecognised government
Yemeni government: Exiled government in Aden led by eight-member Presidential Leadership Council
Southern Transitional Council: Faction in Yemeni government that seeks autonomy for the south
Habrish 'rebels': Tribal-backed forces feuding with STC over control of oil in government territory
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Who is Allegra Stratton?
- Previously worked at The Guardian, BBC’s Newsnight programme and ITV News
- Took up a public relations role for Chancellor Rishi Sunak in April 2020
- In October 2020 she was hired to lead No 10’s planned daily televised press briefings
- The idea was later scrapped and she was appointed spokeswoman for Cop26
- Ms Stratton, 41, is married to James Forsyth, the political editor of The Spectator
- She has strong connections to the Conservative establishment
- Mr Sunak served as best man at her 2011 wedding to Mr Forsyth
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
