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The Fed will not be issuing a digital dollar anytime soon, says Powell

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(Kitco News) - Jerome Powell, Chair of the U.S. Federal Reserve, has silenced the calls for a U.S. central bank digital currency (CBDC) to be issued in the near future, saying that the central bank has “not decided to proceed” with the issuance of a CBDC for the time being.

"We do not see ourselves making that decision for some time," he said Tuesday, speaking remotely on a panel about the role of central banks in digital markets to global financial leaders and crypto regulation experts attending a conference in Paris.

Powell indicated that the central bank would instead be working in collaboration with Congress and the executive branch to evaluate the policy and technological issues. This includes a multi-year period during which the Fed will focus on “building public confidence in our analysis and ultimate conclusions, which we certainly haven’t reached yet.”

The central bank Chair also said the Fed would need approval from the White House and Congress to proceed with a digital dollar.

As for what the central bank will be looking for in the creation of a CBDC, Powell identified four key characteristics: intermediated, privacy-protected, identity-verified, and interoperable.

“First is intermediated. The second is private privacy protected, but the third is identity verified, so it would not be anonymous. It would not be an anonymous bearer instrument. And fourth is transferable or interoperable,” Powell said. “We would be looking to balance privacy protection with identity verification, which has to be done in today’s traditional banking system as well.” 

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According to Powell, the Fed’s sharp interest rate increases this year have contributed to the collapse of some stablecoins and big drops in the value of cryptocurrencies, which led to the onset of a “crypto winter” and revealed the “significant structural issues” that exist in decentralized finance (DeFi). 

The ongoing downturn in the crypto market has given global regulators “more time” to assess the possibility of a digital dollar fully, identify weaknesses and pass “appropriate” regulations, according to Powell, who noted that the “Crypto winter did not have a significant effect on the broader banking system and financial stability.”

This shows that the overlap between the traditional finance and banking systems and DeFi is limited, which Powell highlighted as a positive for regulators. 

“This demonstrates the weaknesses and work that needs to be done,” Powell said, referring to DeFi's structural and transparency issues. “Crypto winter gives us a little bit of time. That situation will not persist indefinitely.”

Issues like the need to regulate unhosted wallets or rouge algorithms were identified as examples of pressure points that need more work. Powell stressed the need to develop “appropriate” regulations moving forward as DeFi gains popularity and attracts more retail investors. 

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