US Federal Reserve is developing a digital currency called the Central Bank Digital Currency, CBDC

Federal Reserve Board Governor Lael Brainard announced Thursday that the Fed is testing a Central Bank Digital Currency (CBDC). Issued by the Fed, the CBDC would serve as digital legal tender, similar to cash, primarily for retail payments.

This information is coming out weeks after China announced it has started test-running it digital currency.

While similar cosmetically to cryptocurrencies like bitcoin, a CBDC would pose more of a threat to commercial banks than to cryptocurrencies. A CBDC could eliminate any dependence on intermediaries by handling the functionality of payment services like account management and customer due diligence, specifically Know Your Customer (KYC) and Anti Money Laundering (AML).

Although the launch timing is uncertain, the Fed is partnering with the Massachusetts Institute of Technology (MIT) to develop the CBDC over the next two to three years. In the press release, Brainard acknowledged the existence of other CBDCs and private cryptocurrencies like bitcoin and Libra, underscoring the need to evaluate them in the US with the following comment: “This prospect has intensified calls for CBDCs to maintain the sovereign currency as the anchor of the nation’s payment systems. Moreover, China has moved ahead rapidly on its version of a CBDC.”

Other central banks are evaluating digital currencies as well. Reuters reported that the European Central Bank is discussing plans for a European public digital currency.

Turkey also has announced plans, with trial runs expected by year end. Meanwhile, China continues to stand firm that it will launch its own digital currency this year, after planning and developing it for the past 5 years.

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