The US Federal Reserve is looking at the pros and cons of issuing a central bank digital currency, or CBDC, for domestic payments.
A centralized digital currency issued by the Federal Reserve, the US central bank, could enable easier and faster electronic payments, but it could add risks to financial stability and reduce privacy compared to cash transactions. Central bank digital currency is the digital equivalent of cash but with the characteristics of digital payments.
The Fed is seeking public comment on the details it released in a discussion paper. The publication of the newspaper has been postponed from summer 2021.
The Fed did not specify its position on the idea of issuing a CBD, but says in the report that if one were created, it would “best serve the needs of the United States by being privacy-protected, mediocre, broadly transferable, identity-verified .”
Compared to cash, the main difference in the generally available CIB currency is that it will be a liability from the Federal Reserve rather than commercial banks, which finance loans through deposits. For example, a central bank digital currency could reduce commercial bank deposits, making credit and loans more scarce and more expensive.
The Fed notes that “central bank digital currency can fundamentally change the structure of the US financial system, changing the roles and responsibilities of the private sector and the central bank.”
The Federal Reserve notes that interest-free cryptocurrencies may have less impact on deposits. The central bank can also set the amount of CBDC that the end user can hold. However, he warns that future disruptions in the financial sector could exacerbate outflows to banks as consumers seek safer central bank digital currencies.
The Federal Reserve’s early exploration of central bank digital currencies is an important moment for this class of digital currencies. China has led this field, distributing more than $5 billion of central bank digital currency “digital yuan” to people since June 2021. The yuan is not the US dollar, the world’s main trade and reserve currency, but a dominant non-US digital currency that could threaten the rule of dollar.
“It is important, however, to consider the implications of a possible future situation where many foreign countries and currency unions may have introduced base cryptocurrency currencies into cryptocurrencies. Some have suggested that if these new crypto-based cryptocurrencies are more attractive From current forms of the US dollar, dollar use may decline — and the US central bank’s digital currency may help preserve the dollar’s international role, the Fed notes.
According to Gartner, about 83 countries are exploring or testing CBDCs. The UK began its exploration of central bank digital currencies last year while Singapore, Australia, South Africa and Malaysia are exploring cross-border CBDC transactions.
The Fed believes that a CBDC designed with an offline capability would benefit in situations such as major internet outages, where digital payments force people to use cash.
The Fed requested public comment on 22 questions covering issues such as the impact of CBDCs on financial stability, questions about anonymity for payments, defenses against cyberattacks on CBDCs, financial inclusion, alternatives to CBDCs, and the Fed’s ability to set monetary policy.
“The introduction of a central bank digital currency would represent a very important innovation in American money,” the Fed says in its paper.
“The Fed does not intend to proceed with a central bank digital currency without clear support from the executive branch and from Congress, ideally in the form of a specific authorization act,” he adds.
The public can submit comments for the next 120 days here.