Sheila Bair, the ex-chair of US Federal Deposit Insurance Corporation (FDIC) recently wrote an article on Yahoo Finance where she urged the Federal Reserve to consider its own cryptocurrency. In the opinion piece, she said that a central bank-issued digital currency (CBDC) “would be as stable as traditional fiat currency, while reducing the risk of financial crises and improving monetary policy tools.”
She strikes out Bitcoin (BTC) as a method of payment and brings up an alternative which is increasingly gaining popularity even among the mainstream economists and central bankers. Bair believes that a hypothetical “FedCoin” would be less prone to instability and fluctuations and the expense of current payment systems will plunge. This will happen because “FedCoin” will eliminate the need for checking accounts, and the costs of maintenance, as well as reduce interchange fees charged by banks and credit cards for small firms.
The Fed has tools that can manage monetary policy according to economic cycles. Currently, the Fed can control the economy by buying and selling securities. But with “FedCoin” all consumers can possess it and change in interest rate can lead to more savings and less expenditure or incentive to spend to stimulate economic growth during the recession.
Bair also states the downside of CBDC - credit availability and illustrates a need for the Fed to stay ahead of cryptocurrency. The money that is currently deposited in the banks which is used to provide credit could disappear if all the transactions are shifted to “FedCoin”. But, “this risk could be mitigated by limiting the amount of FedCoin issued and allowing banks to compete with FedCoin for deposits.”
Also, she states that this will “prompt a different kind of run on banks, as fiat money quickly migrated out of deposit accounts into digital coins.” This new form of bank run will have consequences for not only the banking system but also the Fed whose monopoly would be challenged. But yet, the Fed needs to seriously consider the merits of its own digital currency.