By Howard Schneider
NEW YORK (Reuters) - The development of digital currency and payments technologies could change how the Federal Reserve conducts monetary policy and the composition of its balance sheet, issues the central bank will need to work to understand, New York Fed President John Williams said Wednesday.
"Digital transformation could have implications for markets and for our interactions with counterparties, as well as how we carry out monetary policy," Williams said in opening remarks to a research conference at Columbia University.
"The big question is what a world of digital currencies like stablecoins and (central bank digital currencies) would mean for the implementation of monetary policy. How will central banks anticipate and adapt?" Williams said.
The role of central banks "will always be to supply money and liquidity to bring stability to the economy and financial system," he said. But "it’s critical that we understand how these transformations could affect the economy and the financial system, as well as monetary policy implementation."
The Fed is debating whether to create its own version of a digital currency, and the administration of President Joe Biden is undertaking a broader discussion about the regulation of cryptocurrencies and related technologies like stablecoins.
Regardless of whether the Fed creates a digital dollar, the development of a network of private currencies, the growth in size of stablecoin and crypto markets, and the expansion of private payment options could have a profound impact on banks and the legacy financial system that central bank policy relies upon.