NY Fed’s Williams Says Digital Currency Might Impact Monetary Policy

Key Insights:

• NY Fed President John Williams calls it ‘critical’ for central banks to understand crypto’s impact.
• He noted that digitizing finance could have “implications for markets” and monetary policy.
• The Fed is considering whether to launch its digital dollar, while the Biden administration is looking into regulation.

Few senior Federal Reserve officials have been highly vocal on cryptocurrencies and their potential to disrupt the monetary policy. Vice-chair Lael Brainard recently noted that a central bank digital currency (CBDC) could coexist alongside stablecoins and provide a measure of safety.

Federal Reserve Board Governor Miki Bowman also stressed the importance of innovation in community banking, referring to the latest Fed discussion paper on cryptocurrencies.

For the US, it is still early when it comes to crypto regulation or a CBDC, as the country is still in its research stage.

NY Fed’s President calls digital transformation is ‘critical’

John Williams, the president of the Federal Reserve Bank of New York, sees digital transformation in payments as a possible way to change Fed’s monetary policy and impact its balance sheet.

In his speech during a research conference on Wednesday at Columbia University, Williams said that technology is changing rapidly while the role of the central bank remains the same. He noted,

“The role of central banks will always be to supply money and liquidity to bring stability to the economy and financial system.”

He told an audience of financial industry leaders, central bank officials, and scholars that CBDCs and stablecoins backed by safe and liquid assets have room for innovation. 

His remarks come amid the wider crypto sell-offs, with cryptos like bitcoin (BTC) struggling to catch up above $30,000. The world’s first crypto by market cap is still trading below $30,000 after a deep dive from its all-time peak of over $67,000 in November 2021. 

Terra’s network crash throwing down terra (LUNA) and TerraUSD (UST) prices to the far bottom, has also driven Fed officials like Williams to consider the safe digitization of currencies.

Per a Reuters report, Williams stressed that digital transformation could have “implications for markets” and for Fed’s interactions with peers, “as well as how we carry out monetary policy.” He further said,

“It’s critical that we understand how these transformations could affect the economy and the financial system, as well as monetary policy implementation.”

Senators contribute to digital dollar push

A digital dollar or a CBDC could come with a slew of benefits; however, it remains far from sight.

The crypto price turbulence has called US lawmakers to introduce a bill allowing the US Treasury to create a CBDC. The bill noted that the digital dollar would virtually eliminate funds transfer waiting periods and cut fees.

In March, the Biden administration issued an executive order calling for more research on developing a digital dollar and highlighted a need for more regulatory oversight of cryptos such as ether (ETH), Litecoin (LTC), etc.

Additionally, crypto supporters say that financial inclusion is crucial for the US to adopt its digital currency.

That said, several senators stand positive about bringing a digital dollar to the payments system. For instance, Rep. Stephen Lynch (D-Mass) said,

“As digital payment and currency technologies continue to expand rapidly and with Russia, China, and over 90 countries worldwide already researching and launching some form of Central Bank Digital Currency, it is absolutely critical for the US to remain a world leader in the development and regulation of digital currency and other digital assets.”

Members of Congress, including Jesús Chuy Garcia (D-Ill.), Ayanna Pressley (D-Mass.), and Rashida Tlaib (D-Mich), have also joined Lynch.