Digital currency from US Fed could hurt money market funds

US President Joe Biden's plan to introduce a central bank digital currency (CBDC) may hurt money market funds (MMFs), Fitch Ratings said Tuesday.

The global rating agency said in a statement that US money market funds and other cash investments in the financial system could face disruption if a CBDC is introduced by the Federal Reserve.

"Potential unintended consequences of a CBDC include MMF outflows that could be made worse in times of stress," it said.

"Investors and consumers may view CBDC as an alternative to money market funds or other short-term assets. If introduced, businesses and households may elect to transfer some of their MMF investments into CBDC. This could lead to elevated redemptions for money market funds and exacerbate market illiquidity in times of financial stress if investors move cash to assets perceived to be less risky, such as CBDC," it said.

MMFs, which offer investors high liquidity with very low risk, are mutual funds that invest in highly liquid near-term instruments. They include cash, cash equivalent and debt-based securities with a short-term maturity, such as US Treasuries.

Biden signed an executive order last week to ensure responsible innovation in digital assets and cryptocurrencies, and explore CBDC research and development.

While more than 100 countries are exploring or piloting CBDCs, a digital form of a country's sovereign currency, just a handful have so far issued CBDCs.