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The central bank of the United States, the Federal Reserve System, has been exploring policy responses to the rise of cryptocurrencies and digital currencies. For example, in his press conference after the FOMC meeting that concluded on Sept. 22, 2021, Federal Reserve Chair Jerome Powell acknowledged that the Fed is actively assessing whether it should create a central bank digital currency (CBDC), and a paper soliciting public comment reportedly will be released soon.

On Oct. 13, 2021, Caleb Silver, editor in chief of Investopedia and president of the Society for Advancing Business Editing and Writing (SABEW), discussed the Fed’s stance on these new financial assets with Sunaya Tuteja, the chief innovation officer at the Fed. This article presents highlights of that discussion.

The dialogue between Tuteja and Silver constituted a session in a virtual conference organized by the SABEW, “The Future of Work: The changing global workforce and how it’s reshaping business.” The SABEW is based at the Walter Cronkite School of Journalism and Mass Communication at Arizona State University in Phoenix, Arizona.

Key Takeaways

  • The development of a central bank digital currency (CBDC) will be a multidisciplinary effort.
  • The Fed will seek input and expertise from multiple constituencies before proceeding.
  • “Everything is in perpetual beta; there is no more one and done,” Tuteja said.

About Sunaya Tuteja

As chief innovation officer of the Federal Reserve System, Sunaya Tuteja fills “a new role in which she will lead efforts to identify, research, enable and advocate for new technologies while fostering a culture of innovation, collaboration and experimentation.” Her appointment was effective on Feb. 22, 2021. Prior to that, she spent “more than a decade working at TD Ameritrade [that] included being head of strategic partnerships and emerging technology, and head of digital strategy, experience and innovation.”

The Development Process

In her introductory remarks, Tuteja acknowledged that “oftentimes innovation gets tied to technology.” With that preface, she next said that there are three key elements of the development process, applicable to both private and public institutions.

First, “innovation starts with the gnarly problem to be solved.”

Second, you must decide “how you are going to solve those problems with a keen focus on the customer’s needs.”

Third, you must pay close attention to “how are you looking to future-proof your organization’s value proposition.”

Regarding the upcoming Fed paper on digital currencies referenced above, Tuteja would not give a hint regarding when it might be released. However, she emphasized that its purpose is not to propose policies or solutions, but “to unlock a productive dialogue” with various interested constituencies. She also emphasized that she is not a policymaker and that her comments during this session represent her own views and not necessarily the official views of the Fed.

Questions and Answers

From that point, the discussion generally followed the format of Caleb Silver posing questions to Sunaya Tuteja—either his own or those submitted by other participants in the conference. Most of these exchanges are summarized below.

Q: How far along is the Fed in developing a digital currency?

A: “The issue is multidisciplinary,” touching upon a variety of fields, among them economics, finance, and technology. For example, the Federal Reserve Bank of Boston is working with the Massachusetts Institute of Technology (MIT) on technical aspects.

Q: What has been learned from El Salvador Bitcoin experiment?

A: The Fed is “paying attention” and also monitoring experiments and studies by other central banks around the world.

Q: What is official position on crypto at Fed?

A: Fed Chair Jerome Powell has said that “we are looking to scan and learn.”

Q: What risks does the Fed see in issuing a digital currency?

A: “Everything is in perpetual beta; there is no more one and done … We have to know that there will be unexpected consequences, both positive and negative, that will not be known until after launch … Security and privacy are very top of mind … We must avoid FOMO [fear of missing out].”

Q: How does Fed view the mainstreaming of crypto in financial industry, as evidenced by its introduction to Visa and Mastercard rewards, and the development of crypto investment funds?

A: “As a regulatory organization, it behooves us to pay attention.” Also, the Fed must work with other organizations that have key core competencies that the Fed lacks, as well as a diversity of perspectives.

Q: How can the central bank use best features of blockchain?

A: “How do we unlock the talent in the Fed” is a key imperative. We must “look to the talent that is closest to the customer” and “create a culture of evergreen innovation.”

Q: Do views of crypto vary across the regional Federal Reserve Banks?

A: “The decentralized framework of the Fed is a strength … we’re all working with finite resources, but the different banks have different types of expertise to leverage.”

Q: Crypto is already a $2-3 trillion market, but a fraction of all financial assets. Will it be a more important target of regulation?

A: “It already is a matter of concern and focus.”

Q: How are you working with regulators?

A: “It should be a coordinated effect” with the private sector also brought in “in a collaborative way.”

Q: Money market funds are a cash alternative that creates no worries among the public. How about the worries that various people have about stablecoins and other forms of crypto?

A: “Everyone is on a different baseline … this is evidence of where we are on the maturity curve.” Moreover, “the pace and scale of adoption” has been much faster than expected. “It’s okay to be skeptical, good to ask tough questions, but no longer acceptable to be ignorant” about these assets.

Q: There are growing numbers of advertisements for crypto featuring celebrities, and many people buy on the recommendations of friends. How are you thinking about educating the public?

A: “An educated consumer is a more empowered and confident consumer … we have a treasure trove of historical data.” Also, managing their finances is too low a priority for too many consumers due to “opacity” and other issues.

Q: What are your thoughts and crypto mining and the environment?

A: This is already a topic in the private sector and “not a settled issue … but everyone should be thinking about it and solving it.”

Q: What is your favorite new crypto term?

A: Web 3, another application of blockchain.