China’s rapid development of a digital version of the yuan will not push the Federal Reserve to rush its own digital currency project, Federal Reserve Chair Jerome Powell said on Wednesday, adding that China’s approach would not work in the United States.
Powell, in remarks following the Fed’s latest policy meeting, emphasized the Fed’s primary goal is not speed to market but rather avoiding any calamitous misstep in executing digitalization of the dollar, which remains the world’s dominant reserve currency.
“It is far more important to get it right than it is to do it fast,” Powell said. “The currency that is being used in China is not one that would work here. It’s one that really allows the government to see every payment for which it is used in real time.”
The U.S. central bank is taking its time to understand the capabilities that are possible with digital currencies, Powell said. That includes making sure the technology is being used in a way that makes sense for the country and the people who rely on the dollar as the world’s reserve currency, he said.
“Central bank digital currencies are now possible,” Powell said. “We need to understand whether that is something that would be a good thing for the people that we serve.”
Powell previously made it clear that the Fed cannot move forward on developing a digital currency without congressional action. For now, the Boston regional arm of the Fed is researching what a central bank digital currency would look like in a joint program with the Digital Currency Initiative at the Massachusetts Institute of Technology.
The research project is expected to last two or three years. A separate policy process would be required before the Fed can create a central bank digital currency of its own.
China, in contrast, is already running pilot programs to test out digital yuan. That is causing some analysts to question if the faster pace from the globe’s second largest economy could lead the yuan to gain dominance over the dollar.
The dollar accounted for nearly 60% of the world’s official foreign exchange reserves at the end of 2020, according to the International Monetary Fund, while China’s share is just 2.25%
But some market watchers agree with Powell that investors and other parties won’t necessarily rush into digital yuan, despite its early entry into the digital currency universe.
“You are looking at a currency that will essentially have no anonymity and will be strictly under the control of the state,” said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto. “It is apples and oranges. It’s a very different financial system and a very different set of objectives that the Fed is seeking to achieve here.”
