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Balancing privacy and transparency needed if U.S. issues CBDC, Mester says

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Rob Kim

In deciding on whether the Federal Reserve should issue a central bank digital currency, one important issue will be “how to ensure security and balance privacy with transparency,” Cleveland Fed President Loretta Mester said Tuesday in a speech at the Chicago Payments Symposium.

No decision has been made yet on if it will issue a CBDC. Fed Chair Jerome Powell has said it will need backing from Congress to create a CBDC.

Mester also pointed to other facets of a CBDC that need to be studied, including its implications for financial stability, global financial market functioning, and the transition of monetary policy.

Meanwhile, the Fed is researching and experimenting with underlying technologies. “We are gaining insights that will not only help inform a future decision on a CBDC but also aid our current work on faster payments, interoperability between payment systems, and payment system resiliency,” she said.

Payment systems are also evolving and both providers and regulators will must ensure that customer accounts will be adequately protected against cybersecurity breaches, fraud, and data leakage. Quantum computing is one technology that will require rethinking customer privacy protection, she said. “The traditional way of keeping data private, by taking away names or otherwise anonymizing it, no longer works in a world rich with multiple data sources that can be cross-referenced to de-anonymize the data and reveal identities.”

How the Federal Reserve supervises the payment system will also need to evolve. “The public policy approach will need to change to include a more holistic blending of financial regulation, antitrust policy, and data privacy regulation,” Mester said.

“As new providers enter the field, we’ll need to focus more on the risks a service entails rather than on the type of entity providing the service,” she said. That would limit “regulatory arbitrage” while supporting financial stability and innovation. The Fed’s guidelines approved in August uses a three-tiered review framework “that entails more extensive review for entities that entail greater risks,” Mester said.

In June, Powell said a U.S. CBDC could preserve the dollar’s standing as the global reserve currency.

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Rob Kim

In deciding on whether the Federal Reserve should issue a central bank digital currency, one important issue will be “how to ensure security and balance privacy with transparency,” Cleveland Fed President Loretta Mester said Tuesday in a speech at the Chicago Payments Symposium.

No decision has been made yet on if it will issue a CBDC. Fed Chair Jerome Powell has said it will need backing from Congress to create a CBDC.

Mester also pointed to other facets of a CBDC that need to be studied, including its implications for financial stability, global financial market functioning, and the transition of monetary policy.

Meanwhile, the Fed is researching and experimenting with underlying technologies. “We are gaining insights that will not only help inform a future decision on a CBDC but also aid our current work on faster payments, interoperability between payment systems, and payment system resiliency,” she said.

Payment systems are also evolving and both providers and regulators will must ensure that customer accounts will be adequately protected against cybersecurity breaches, fraud, and data leakage. Quantum computing is one technology that will require rethinking customer privacy protection, she said. “The traditional way of keeping data private, by taking away names or otherwise anonymizing it, no longer works in a world rich with multiple data sources that can be cross-referenced to de-anonymize the data and reveal identities.”

How the Federal Reserve supervises the payment system will also need to evolve. “The public policy approach will need to change to include a more holistic blending of financial regulation, antitrust policy, and data privacy regulation,” Mester said.

“As new providers enter the field, we’ll need to focus more on the risks a service entails rather than on the type of entity providing the service,” she said. That would limit “regulatory arbitrage” while supporting financial stability and innovation. The Fed’s guidelines approved in August uses a three-tiered review framework “that entails more extensive review for entities that entail greater risks,” Mester said.

In June, Powell said a U.S. CBDC could preserve the dollar’s standing as the global reserve currency.

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