On January 20, 2022, the Federal Reserve Board published a discussion paper on the potential for a US central bank digital currency, or CBDC. Entitled “Money and Payments: The U.S. Dollar in the Age of Digital Transformation,” the paper provides further insight into the public policy concerns guiding the Fed as it deliberates whether to adopt a US CBDC.
For the purpose of the paper, the Fed defines a CBDC as “a digital liability of a central bank that is widely available to the general public.” In this respect, the paper notes that a CBDC is conceptually analogous to a digital form of paper money. The Fed is careful to note that the paper is not intended to advance any specific policy outcome, nor is it intended to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a US CBDC. The paper is also clear that the 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.
This paper begins with an overview of existing forms of money and the US payment system. It next moves on to summarize some of the various digital assets that have emerged in recent years, including stablecoins and other cryptocurrencies. The paper observes that cryptocurrencies have not been widely adopted as a means of payment in the United States, that they remain subject to extreme price volatility, are difficult to use without service providers, and have severe limitations on transaction throughput. The Fed also assert that many cryptocurrencies also come with a significant energy footprint and make consumers vulnerable to loss, theft, and fraud.
The paper then turns to CBDC more specifically, starting with hypothetical use cases before moving on to potential benefits and risks. In terms of benefits of a US CBDC, the Fed identifies facilitating the ability to meet future needs and demands for payment services, improving cross-border payments, supporting the US dollar’s international role, fostering financial inclusion, and extending public access to safe central bank money. Principal risks of a US CBDC include safety and stability of the financial system, diminished efficacy of monetary policy implementation, cybersecurity, potential privacy and data protection issues, and the prevention of financial crimes. Ideally, the paper opines that a US CBDC would be privacy-protected, intermediated, easily transferable and identity-verified.
The discussion paper also lays out a series of policy objectives for a US CBDC, including among other things that it must:
- provide benefits to households, businesses, and the overall economy that exceed any costs and risks;
- yield such benefits more effectively than alternative methods;
- complement, rather than replace, current forms of money and methods for providing financial services;
- protect consumer privacy;
- protect against criminal activity; and
- have broad support from key stakeholders.
The paper concludes with a broad request for comment on a range of topics including benefits, risks, design and functionality of a hypothetical US CBDC. The Fed intends to accept public comments for 120 days.