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Bank of Cleveland CEO provides insights into the digital dollar

Issues related to financial stability, market structure, security, privacy, and monetary policy need to be better understood, Mester stated

In a keynote address yesterday, the President and CEO of the Federal Reserve Bank of Cleveland, Loretta Mester, revealed details of ongoing research into a potential digital dollar. She explained that a Central Bank Digital Currency has been in the talks for the Federal Reserve since before the pandemic and added that the Board of Governors has been “building and testing a range of distributed ledger platforms to understand their potential benefits and trade-offs”.

“Payments system is a crucial part of the infrastructure of the U.S. and a well-functioning and secure payments system is vital for a sound economy,” she explained, adding that although the pandemic had taken precedence for now, important projects that have longer-run consequences for the payments system are also being explored.

Speaking at the 20th Anniversary Chicago Payments Symposium via videoconference, Mester stated regional Federal Reserve branches have been at the forefront of taking initiatives to modernise payment systems. She mentioned the multi-year partnership between the Massachusetts Institute of Technology (MIT) and the Boston Fed, in addition to collaboration between the Fed’s New York Branch and the Bank for International Settlements.

Depending on how CBDCs are designed, central banks could support them without the need for commercial bank involvement via direct issuance to the end-user’s digital wallets, Mester explained.

Mester stated that research into a potential digital dollar was ongoing, but clarified that such initiatives should not be considered as a “signal any decision by the Federal Reserve to adopt such a currency.”
She added that issues related to “financial stability, market structure, security, privacy, and monetary policy all need to be better understood”.

COVID 19 has created significant disruptions in the payments sector, resulting in major changes to the patterns and volume of domestic transfers, Mester explained.

“The spread of COVID-19 heightened the reliance of businesses and individuals on digital services and faster connectivity, as many employees began to work from home and consumers turned to online shopping,” Mester stated.

She further emphasised the importance of making necessary investments to ensure that US payments systems remain resilient in the face of extreme stress events in the future.

Mester’s speech comes two weeks after the Central Bank of The Bahamas announced that the country will be the first to launch a CBDC. The announcement further added that the Bahamas ‘Sand Dollars’ will be launched nationwide in October.

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