The Federal Reserve is soliciting ideas on a digital currency from the U.S. Central Bank


On January 20, 2022, the Federal Reserve Board published an article that it described as the first step in a public discussion between the Federal Reserve and stakeholders on central bank digital currencies (CBDC). The document, after providing a brief overview of existing forms of currency and the US payment system, goes on to describe the essential characteristics of a possible US CBDC. The paper then analyzes the key benefits, risks, and policy considerations of adopting a US CBDC and ends with a request for comment. Comments, to be provided in the form of responses to the specific questions listed in the document, can be submitted until May 20, 2022.

In the document, the Fed clarified that it does not intend to proceed with issuing a CBDC without clear support from the executive branch and Congress, ideally in the form of authorizing legislation. .

The essential characteristics of an American CBDC

The Fed describes a potential US CBDC as a digital liability of the Federal Reserve that would be widely available to the general public. The Fed points out that a CBDC could provide households and businesses with an electronic form of central bank money. This is a “highly significant innovation in US currency” as there are currently two other forms of central bank money in the US: physical currency issued by the Federal Reserve and digital balances held by commercial banks. from the Fed.

The Fed identifies some essential characteristics for a CBDC to best meet the needs of the public in the United States:

  • Privacy: Privacy is a primary concern that must be balanced with the need for transparency to deter criminal activity.
  • Intermediary: A CBDC should be intermediated by private sector entities such as commercial banks and regulated non-bank financial service providers who would offer digital accounts or wallets for the management of CBDC assets and payments. The Fed explains that the Federal Reserve Act does not allow direct Federal Reserve accounts for individuals, and such accounts would represent a significant expansion of the Federal Reserve’s role in the financial system and economy.
  • Transferable: A CBDC should be easily and transparently transferable in order to become an efficient payment system widely used throughout the economy, including in cross-border transactions.
  • Verified Identity: A CBDC should be designed to comply with anti-money laundering and anti-terrorist financing rules, largely centered on identity verification requirements.

Benefits of an American CBDC

The Fed identifies a number of benefits of a US CBDC:

  • The Fed highlights the ability of a CBDC, as a currency free from credit and liquidity risk, to foster innovation to create new payment services. A CBDC (unlike existing digital currency, including stablecoins and other cryptocurrencies) would not require payment services to implement mechanisms to reduce liquidity risk and credit risk and would not require not small businesses to issue their own form of private currency in order to create new payment services. These two characteristics would, according to the document, support innovation in the private sector.
  • With good international coordination, the Fed believes another benefit of a U.S. CBDC is the potential to streamline costly and slow cross-border payments.
  • The document also notes that issuing a US CBDC would be essential to preserve the dominant international role of the US dollar. If foreign countries introduce CBDCs that are more attractive than existing forms of the US dollar, the global use of the dollar could decline, jeopardizing the reserve currency status of the US dollar and increasing transaction and borrowing costs for investors. households, businesses and the US government.
  • Finally, a U.S. CBDC could promote financial inclusion for low-income and unbanked households by facilitating access to financial services and savings opportunities and reducing transaction costs related to taxes, wages, and other payments. .

Risks and Political Considerations of a US CBDC

The Fed has also identified several risks associated with issuing a US CBDC:

  • A US CBDC could fundamentally change the structure of the US financial system. A CBDC could replace money held in commercial banks, reduce bank deposits, and reduce funds readily available for commercial banks to lend. Thereafter, bank funding outlays would increase, credit availability would be reduced, and credit costs for households and businesses would increase.
  • The introduction of a US CBDC could affect the implementation of monetary policy by complicating the Fed’s ability to manage reserves and influence interest rates.
  • Finally, the operational and cybersecurity risks that threaten existing payment systems would be even more difficult for a US CBDC, as a network of CBDCs could potentially have more entry points than existing payment services. Therefore, the infrastructure of a US CBDC should be extremely resistant to such threats and the operators of this infrastructure should devote considerable effort and resources to security.

Q&A

In exploring the risks and benefits associated with a CBDC, the Fed has expressly stated that it will not be making any imminent decisions regarding the issuance of a US CBDC. The publication of the document shows that the Fed has a real interest in engaging in dialogue with stakeholders. The Fed is presenting a series of questions relating to its review, seeking responses by May 20, 2022. In particular, it seeks comments on additional risks and benefits and whether there are alternative solutions that would provide some or all advantages presented by a CBDC. Finally, in addition to a series of detailed questions, the Fed is looking for CBDC design ideas that could mitigate some of the stated risks.

By releasing the document, the Fed recognizes the demands that rapidly evolving technological capabilities, driven by the blockchain revolution, have on market realities. For now, parties interested in the policy outcomes that are sure to involve Congress, the executive branch, and the Fed would do well to carefully review the document and provide comment in the face of a rare opportunity to shed light on a such an important discussion.

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