Fed Contemplates Offering Online Banking Services

The Federal Reserve Bank of St. Louis has published new research on the reasons why America’s central bank should not issue its own cryptocurrency. While the St. Louis Fed discourages the adoption of a government-backed Bitcoin in the report, the regional branch does find a potential future for central bank online money- essentially online bank accounts housed with the Federal Reserve for “all households and firms.”

Such a proposal would shift electronic payments away from commercial financial institutions to the central bank. “Virtual money” from a centralized bank source has some advantages over simple cash transactions and the use of commercial accounts. The guarantees provided by a central bank remove counterparty risk from transactions by limiting the debt liability of commercial institutions without requiring consumers to carry cash.

Adding the option of central bank accounts could also force commercial banks to improve account benefits, like higher interest rates, in order to retain deposit holders. A central bank option also gives consumers an alternative in the event commercial banks cause another financial collapse through irresponsible investing.

Just last week Sen. Kirsten Gillibrand (D- NY) announced a bill that would add a number of banking services, like checking accounts, debit cards, and short term loans, to the nation’s more than 30,000 post offices. The Postal Bank concept is pressed as a way to bring access to bank services to more underserved communities. There are few banks located in low income and rural areas. However, post offices are located in nearly every small town in America.

With millions of Americans having no bank account at all, a central bank virtual account could serve as a bridge for those consumers to join the rapidly digitizing economy.