The Federal Reserve is asking for the public’s help in weighing whether the United States should develop and adopt a central bank digital currency.
The Fed took the first step in the consideration process Thursday when it released its much-anticipated discussion paper. The 40-page document makes no policy recommendations regarding the adoption of a CBDC but did discuss the potential benefits and risks of doing so.
The paper examines the current domestic payment system and emerging digital payment systems that have been developed over the past few years. The Fed is soliciting public comment about the notion of a centralized digital currency for the next four months and is encouraging the public to share its thoughts.
“We look forward to engaging with the public, elected representatives, and a broad range of stakeholders as we examine the positives and negatives of a central bank digital currency in the United States,” said Fed Chairman Jerome Powell.
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The Fed said that among the benefits of a digital dollar is that it could offer the general public broad access to digital currency that is free from credit and liquidity risk.
“A CBDC might also help to level the playing field in payment innovation for private-sector firms of all sizes,” the report reads. “For some smaller firms, the costs and risks of issuing a safe and robust form of private money may be prohibitive. A CBDC could overcome this barrier and allow private-sector innovators to focus on new access services, distribution methods, and related service offerings.”
The paper also said that a CBDC could streamline cross-border payments and could further enshrine and preserve the dominance of the U.S. dollar’s international role, including as the world’s reserve currency. It also mentions the implications of a global future in which there are several CBDCs based on the currencies of other countries.
“Some have suggested that, if these new CBDCs were more attractive than existing forms of the U.S. dollar, global use of the dollar could decrease — and a U.S. CBDC might help preserve the international role of the dollar,” the report reads.
Among the risks are that the adoption of a digital dollar could “fundamentally change” the structure of the country’s financial system and alter the roles and responsibilities of the Fed and private sector.
“Banks currently rely (in large part) on deposits to fund their loans. A widely available CBDC would serve as a close — or, in the case of an interest-bearing CBDC, near-perfect — substitute for commercial bank money,” the paper notes. “This substitution effect could reduce the aggregate amount of deposits in the banking system, which could in turn increase bank funding expenses, and reduce credit availability or raise credit costs for households and businesses.”
The white paper points out that financial institutions need to comply with a wide array of rules that are designed to prevent money laundering and terrorism financing, and a U.S. CBDC would need to be designed in a manner that permits compliance with these rules.
It goes on to say that a CBDC would also be subject to the same threats that existing payment services face, including cybersecurity risks and operational disruptions. Developing defenses against those threats could be challenging because a digital dollar network might have more entry points than current payment services.
Crucially, the discussion paper notes that the central bank “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.”
Senate Banking Committee Chairman Sherrod Brown, an Ohio Democrat, praised the Fed’s move as a “good first step that will bring more Americans into our banking system.”
Sen. Pat Toomey, the ranking member of the committee, said he is glad the Fed has “constructively contributed to the necessary ongoing public discussion regarding the issuance of a CBDC,” although he expressed concern that a CBDC could lead to a loss of privacy.
“Today’s report is an important step by the Fed in acknowledging the permanence of cryptocurrencies and their underlying technologies,” the Pennsylvania Republican said.
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In testimony before Congress last year, Powell said he was “legitimately undecided” about the cost-benefit analysis of a CBDC but is keeping an open mind.
The U.S. isn’t alone in its exploration of a CBDC. The People’s Bank of China has been working on its so-called digital yuan for years and envisions its citizenry eventually using the technology to pay for goods and services without physical coins and bills.
