Cornell’s Eswar Prasad Calls for Fed-Backed Cryptocurrency

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A Cornell University professor took to the pages of The New York Times on Thursday to call for a government-backed digital currency capable of imposing an “incentive” to make Americans spend faster.

“To keep their money relevant, many central banks are experimenting with digital versions of their currencies,” Eswar Prasar, a professor of trade and a senior fellow at the Brookings Institution, noted in the column. “These currencies are virtual, like Bitcoin; but unlike Bitcoin, which is a private enterprise, they are issued by the state and function much like traditional currencies.”

Prasar argued the United States Federal Reserve should follow countries including China, Japan, and Sweden in working to establish a centralized cryptocurrency, saying it could be “a lost opportunity.”

The benefits of digital currency, Prasar said, included allowing the government to monitor how it was spent, and enabling the Federal Reserve to “stimulate” spending. “Typically, if the Federal Reserve wants to stimulate consumption and investment, it can cut interest rates and make cheap credit available,” he wrote. “But if the economy is cratering and the Fed has already cut the short-term interest rate it controls to near zero, its options are limited. If cash were replaced with a digital dollar, however, the Fed could impose a negative interest rate by gradually shrinking the electronic balances in everyone’s digital currency accounts, creating an incentive for consumers to spend and for companies to invest.”

With respect to tracking transactions, he added, “A digital dollar … would bring ‘off the books’ economic activity out of the shadows and into the formal economy, increasing tax revenues. Small businesses would benefit from lower transaction costs, since people would use credit cards less often, and they would avoid the hassles of handling cash.”

The idea of a government-backed cryptocurrency — often referred to as a Central Bank Digital Currency, or CBDC — has been bandied around by regulators in the Biden administration. Those regulators have refrained from making commitments about policies that might be developed, though Federal Reserve Chair Jerome Powell told the House Committee on Financial Services this month the Fed would be issuing a long-awaited report on CBDCs by September.

“The end of cash is on the horizon, and it will have far-reaching effects on the economy, finance and society more broadly,” Prasar asserted in Thursday’s op-ed. “With proper preparation and open discussion, we should embrace the advent of a digital dollar.”

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