The Fed will take another step towards developing a digital currency this summer

The Federal Reserve is pushing ahead with its efforts to develop its own digital currency, and announced Thursday that it will publish a research paper this summer exploring the move further.

Although the central bank has not made specific plans for the currency, Chairman Jerome Powell cited the advancement of payment technology, saying the Fed had “carefully monitored and adjusted” these innovations.

“The effective functioning of our economy requires that people not only have confidence in the dollar but also in the payment networks, banks and other payment service providers that enable the daily flow of money,” Powell said in a video message accompanying the announcement.

“Our focus is on ensuring a secure and efficient payment system that delivers great benefits to American households and businesses while enabling innovation,” he said.

Fed officials have emphasized the importance of getting a central bank digital currency issuance right rather than competing in a race with their global counterparts.

However, moves by several countries, most notably China, in the central bank’s digital currency (CBDC) space have intensified the discussion about how aggressively the Fed should move. China’s progress has raised concerns that it could undermine the dollar’s position as a global reserve currency.

Powell noted the growing popularity of digital currencies such as Bitcoin, but said that they continue to be inefficient payment mechanisms. Stable coins tied to specific currencies offer other advantages.

“Technological advances are also opening up new opportunities for central banks, including the Fed,” said Powell. “While different structures and technologies could be used, a CBDC could be designed for the general public.”

The Fed has been researching payment systems for several years and plans to release a product called FedNow, which is expected to solve many problems related to the need for the immediacy of transactions as well as the plight of non-banks in 2023.

However, digital coins represent another avenue central banks are pursuing to make payments more efficient. However, there are still some implementation issues that have slowed efforts.

“We have an obligation to the Federal Reserve to hear a wide range of voices on this important issue before making a decision on whether and how to deal with a US CBDC, taking into account the wider risks and opportunities that it poses it might offer, “Powell said. “The paper is the beginning of a thoughtful and considered process.”

The Fed is working on the project in collaboration with various groups, including the Bank for International Settlements. The Boston Fed has taken the lead on the project.

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