In the Federal ReserveDigital currencyWe should refocus on the reform of federal deposit insurance. From a depositor’s perspective, the only significant difference between Federal Reserve digital currency deposits and traditional bank deposits is that the latter have limited deposit insurance coverage.
The Federal Reserve issues two types of central bank money: Federal Reserve paper banknotes and digital banknotes Federal Reserve deposit Recorded in (electronic) ledger entries that do not have a physical format. Federal Reserve Bank digital deposits can only be held by financial institutions (primarily banks) that are eligible to have a primary account with the Federal Reserve Bank.
Most businesses and consumers are prohibited from owning a Federal Reserve Master Account, so exchange central bank money in the form of paper money for “bank money” (equivalent to banknotes in paper of the Federal Reserve) Has a digital currency in the form of possible banknotes). Unlike central bank digital currency, digital deposits issued by banks can suffer losses by default if the bank that issued the deposit goes bankrupt. Bank deposit balances of up to $ 250,000 per depositor are fully insured by the Federal Deposit Insurance Corporation, but the maximum effective insurance coverage for bank deposits is simply to have deposit accounts at multiple banks. You can increase it.
Bank for International Settlements To define The central bank’s digital currency is “a digital payment instrument expressed in national accounting units, which is the direct responsibility of the central bank”. The Federal Reserve’s main account deposits are in central bank digital currency, but current laws and regulations severely limit their ownership. The discussion of the benefits of the Federal Reserve’s issuance of digital currencies is essentially a discussion of the goals and restrictions associated with the Federal Reserve Master Account.
Federal Reserve digital currencies for non-bank depositors can be easily created using existing institutions and payment systems. He invents a new class of bank deposits backed 100% by deposits in the Federal Reserve main account of the issuing bank, the ownership of which is completely separate from other deposit accounts issued by the issuing bank in the Bank Resolution of the FDIC. Can be created by. In other words, if a bank goes bankrupt, the Federal Reserve balance associated with this special category of depositors remains the property of the bank account holder, and these, as the FDIC normally does today, The account will be transferred to another financial institution with the ability to pay. Bank deposits insured in the event of bank failure.
This special type of bank deposit is fully guaranteed by the federal government and should be totally exempt from the assessment of deposit insurance premiums. Unfortunately, new legislation is needed to exclude these deposits from the valuation basis for deposit insurance. From a practical point of view, there must be a legal delay between when a customer requests that a regular bank deposit be transferred to this new deposit class and the actual transfer is made. .. Banks need a reasonable period of time to adjust their investments to take into account changes in federal main account reserve balances generated by transfers between deposit accounts.
Banks are free to offer these new types of deposits as needed, perhaps with their own limits on the ability of account holders to transfer funds between the bank’s regular deposits and the bank’s digital deposit account. Federal Reserve. Can be provided. These new digital deposits from the Federal Reserve are fully transferable through existing bank payment systems, making real-time retail payment processing available, making them faster and more efficient. No new blockchain payment system network or other modifications to the current payment system are required.
One of the big open questions is whether the Fed should pay interest on the bank balances of these segregated master accounts. If the Fed does not pay interest, these balances will be treated the same as banknotes or banknote deposits before the enactment of the Dodd-Frank Act. If these accounts pay interest, the interest rate may be set differently from the interest rate currently paid by the Fed on the bank’s main account balance. As part of this approach, the special rates of digital currency accounts will be a new tool for the implementation of monetary policy. The “high” rates on these accounts attract money from traditional bank deposits and money market funds to the Fed’s digital currencies, reducing the lending capacity of financial intermediaries and limiting economic growth.
While bank investors run out of traditional bank deposits and money market funds to secure the Fed’s digital currency account, the Fed’s digital currency remains a potential destabilizing force for the financial panic. .. The legally prescribed time between receipt of a disbursement request and its disbursement can be of great help in eradicating these concerns.
Paul H. Kupiec is a resident student at the American Enterprise Institute (AEI) studying systemic risk and the management and regulation of banking and financial markets.