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COVID-19 Reignites Central Bank Focus on Digital Currencies

Public Interest in CBDCs Rises

The COVID-19 pandemic has shed light on the possibilities of central bank digital currencies, or CBDCs. Economists have discussed how CBDCs could work for decades. As digital payments gain popularity, and as governments look for ways to prop up their economies, these digital currency systems have garnered new attention from lawmakers and citizens around the world.

A study of public interest in CBDCs published yesterday showed that in 2020, people are more interested in information about CBDCs than ever before. So far this year, searches on Google (GOOGL), Baidu (BIDU), and other search engines around the world for information about CBDCs are outpacing searches for information about private crypto currencies like Bitcoin and Facebook’s (FB) Libra.

New Tools for the Federal Reserve

The Federal Reserve announced plans to build an experimental digital currency with help from researchers at MIT. Bills urging for the creation of a CBDC have come out of both the House and Senate this year. A digital currency would give the government a number of new tools to stimulate the economy, like the ability to quickly send money to citizens. It could also give the Fed the ability to efficiently move interest rates by setting the rates on people’s digital currency accounts.

If Congress is unable to pass more economic stimulus the Fed will need to step in—but its current abilities do not allow it to support the economy the way a CBDC would. Concerns are mounting about a K-shaped recession in the US. This means that since more white-collar workers than blue collar workers have kept their jobs, the wealthy may get wealthier while low-income people suffer the brunt of the fallout from the pandemic. A CBDC might be able to help the Fed more effectively prevent wealth and income inequality.

The People’s Bank of China Tests its CBDC

The People’s Bank of China, China’s central bank, made significant progress creating and testing its own digital currency. The bank partnered with Didi Chuxing, a rideshare and delivery service in China, to test the currency. It also paid some government employees using the currency. Two weeks ago, the bank announced plans to conduct further tests of the currency in Beijing, Hong Kong, and other regions.

The Fed’s plans for a CBDC are in much earlier stages, but momentum is building. Starting on Thursday, the Fed will hold its annual Jackson Hole Symposium virtually. Economists and investors will be eager to see if the central bank will provide more information about its plans for a CBDC at this meeting.

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