Cleveland’s Federal Reserve Bank president and CEO Loretta Mester has given more insights into ongoing research into the use cases of a central bank digital currency.
Speaking at the 20th Anniversary Chicago Payments Symposium event earlier this week, Mester addressed a number of major talking points concerning the United States’ payments landscape.
The space has been understandably affected by the ongoing COVID-19 pandemic and the US banking, financial and payments sector has had to innovate in order to deal with various changes to the global economy.
As Mester told the symposium during the speech, the American financial and payments sectors have proven to be fairly resilient amid the ongoing pandemic and various research projects have been able to continue in the background.
Nevertheless a key takeaway and consideration for the US payments system will be continuing to invest in new technology that will underpin the future of the space, as the world begins to adapt to a ‘new normal’ way of life.
Tech is key
Mester highlighted the need for ongoing investment and development of future-fit infrastructure and technology as the world responds to the effects of the global pandemic.
Payments behaviour has reportedly changed in the wake of COVID-19 which has placed a greater reliance on digital services and high-speed network capabilities as more workers and consumers begin working and interacting with services remotely.
“This is a global pandemic, and demand for consumer-to-consumer and cross-border payments has risen, as people want to send and receive payments in support of family and friends. Some payments technology is more resilient, scalable, and adaptable to such rapid changes in user behavior and volume,” Mester said in her speech.
The Cleveland FRB president noted that industry participants have noted that cloud-based services offer scalability and adaptability. While the pandemic has expedited a move to digital-based services, Mester insists that the Federal Reserve has been actively looking to be at the forefront of modernising its ways of working.
“Industry efforts to replace decades-old core banking systems with more flexible, resilient, and cloud-friendly platforms, and to integrate the old with the new along the way, may need to be accelerated to ensure that we are prepared for the future.”
CBDC research well-underway
The Federal Reserve has previously revealed that research and testing of the use-cases and potential benefits and drawbacks of a CBDC are well underway. As previously reported by The Daily Chain, the Boston Federal Reserve Bank has been working with MIT to explore and develop a codebase for testing a CBDC.
Mester mentioned this initiative as part of a section of her speech focused on CBDCs. The CEO also elaborated on a proposal for the Federal Reserve to issue ‘digital dollars’ directly to Americans.
“Legislation has proposed that each American have an account at the Fed in which digital dollars could be deposited, as liabilities of the Federal Reserve Banks, which could be used for emergency payments. Other proposals would create a new payments instrument, digital cash, which would be just like the physical currency issued by central banks today, but in a digital form and, potentially, without the anonymity of physical currency.”
Mester suggested that central banks could support these systems without the need for commercial banks by issuing digital currency to individuals’ digital wallets which would be powered by the central bank’s own transfer and redemption payments services.
Nevertheless Mester highlighted the need for more research and testing of potential systems for this to be considered as a viable future payment alternative. This is ongoing, with the Fed’s Board of Governors having setup a technology lab that is building and testing a number of distributed ledger platforms.
Mester also mentioned that the New York Federal Reserve Bank established an innovation center with the help of the Bank for International Settlements that is gathering insights into crucial trends and technology that could benefit central banks.
