Word that the Federal Reserve was open to the prospect of launching a cryptocurrency made headlines late last year, but what is actually much likelier is that the Fed will create “central bank electronic money for all,” researchers at the St. Louis Fed say in a new blog post.
The latter would also be easy to implement. The Fed would only need to allow households and firms to open accounts with it, which would allow the central bank to make payments with Fed-issued electronic money instead of commercial bank deposits.
Some experts, like Ken Rogoff of Harvard University in his book “The Curse of Cash,” think the use of cash will diminish. Critics say it is inefficient, can promote crime, and limits the ability of the Fed to use negative interest rates as a policy option in a severe recession.
“A large part of the population will consider [Fed electronic money] a close substitute for cash, and this will make it easier to say goodbye to cash,” the blog post said. At the moment, only a few financial intermediaries have access to central-bank electronic money.
An alternative to cash is a given in the near future, according to Aleksander Berentsen, a research fellow at the St. Louis Fed and the lead author of the post.
For instance, legislation introduced last week by Sen. Kristin Gillibrand calls for the 36,000 post offices around the U.S. to add basic banking services, such as savings and checking accounts and short-term loans. It aims to reach a still significant number of unbanked and underbanked Americans with an offering similar to that of postal systems overseas. With the bill, the New York Democrat said she hopes to “wipe out” the so-called payday lenders that charge interest rates well above prevailing bank rates.
The new alternative form of electronic money would have a disciplinary effect on commercial banks. They would be forced to alter their business models to attract depositors; for example, taking fewer risks or holding more capital and offering higher interest rates.
The Fed could set the interest rates on the household accounts as its main policy tool.
One potential downside is there might be a bank panic if customers quickly shift funds to central-bank accounts, in which case the Fed could have to step in.
The chatter that the Fed is eventually going to issue a crypto fashioned after bitcoin BTCUSD, -0.43% is “naive,” according to Berentsen.
Central banks just don’t want to get into the business of issuing anonymous virtual currency that could be used by a drug cartel to launder money, he said.