In a new report, the Federal Reserve Board ("FRB") considered the merits of a potential U.S. central bank digital currency ("CBDC") and invited public comment on both a proposed U.S. CBDC and the current domestic payments system. The FRB also summarized the current usage of digital assets, including both stablecoins and other cryptocurrencies, for making payments.

Features and Functions

The CBDC discussed in the report would be a digital liability of the Federal Reserve that (i) would "not require mechanisms like deposit insurance to maintain public confidence," and (ii) would not depend on "backing by an underlying asset pool to maintain its value." The FRB noted that a U.S. CBDC would have "no associated credit or liquidity risk," and that CBDC transactions would need to be "final and completed in real time."

The FRB also emphasized that a potential U.S. CBDC would be most beneficial if it:

  • protected consumers' privacy while appropriately balancing privacy safeguards with sufficient transparency so as to "deter criminal activity";
  • involved financial intermediaries, including commercial banks and nonbank financial services providers, that would offer accounts or digital wallets in order to enable CBDC payments and holdings to be effectively managed in an open market for CBDC services;
  • was "readily transferable between customers of different intermediaries"; and
  • was designed to comply with federal anti-money laundering regulations in order to facilitate the verification of the identity of those accessing the CBDC.

Potential Merits and Risks

In examining the merits of a U.S. CBDC, the FRB focused on a CBDC's role as a bridge between legacy payment systems and an increasingly digitizing economic landscape. Among other things, the FRB highlighted the following potential benefits of a U.S. CBDC:

  • enabling the public to have broad access to digital money not subject to credit and liquidity risk, which could facilitate private-sector innovation with respect to payment services;
  • streamlining cross-border payments by "creating additional opportunities for cross-jurisdictional collaboration and interoperability";
  • reinforcing and bolstering the international role of the U.S. dollar; and
  • promoting greater financial inclusion, especially with respect to U.S. households and communities in "economically vulnerable" positions.

In considering risks of CBDC implementation, the FRB stressed that a potential U.S. CBDC, among other things, could:

  • increase bank funding expenses and reduce the availability of credit to households and businesses due to the fact that a broadly available, interest-bearing CBDC would serve as a "near perfect. . .substitute for commercial bank money";
  • exacerbate the severity and likelihood of runs on financial firms, due to the ability of the public to quickly convert various forms of money into the CBDC;
  • alter the ability of the Federal Reserve to implement monetary policy and interest rate controls by "altering the supply of reserves in the banking system"; and
  • be subject to numerous cybersecurity risks and pose cybersecurity challenges because "a CBDC network could potentially have more entry points than existing payment services."

Public Comment and Next Steps

The FRB invited the public and CBDC stakeholders to provide comment by May 20, 2022 on the various legal, policy, and technological design considerations of a U.S. CBDC. The FRB also pointed out that the report itself is only "the first step" in a larger public discussion between the FRB and the various possible stakeholders of a U.S. CBDC. The FRB commented that it (i) "would only pursue a CBDC in the context of broad public and cross-governmental support," and (ii) "does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law."

Commentary

The FRB did not recommend any policy outcome, and in fact, stated that a decision on CBDC really should be made by Congress and/or the executive branch, noting "[t]he Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law."

Further, the FRB stated that a CBDC in the United States should be intermediated - i.e., the private sector would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments. This is an important statement in light of some policymakers and politicians calling for individual accounts for individuals at the FRB.

Commentary

Notably, the FRB identifies as a significant risk, that a U.S. CBDC may lead to a disintermediation of private sector financial institutions by allowing investors to hold their money directly with the government, rather than through a bank or money market fund.

Primary Sources

  1. Federal Reserve Board releases discussion paper that examines pros and cons of a potential U.S. central bank digital currency (CBDC)
  2. Money and Payments: The U.S. Dollar in the Age of Digital Transformation

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