The US Federal Reserve has released its eagerly-anticipated paper into the pros and cons of a potential digital dollar.
The 40-page ‘Money and Payments: the US Dollar in the Age of Digital Transformation’ document asks for public comment on more than 20 questions about a potential US central bank digital currency (CBDC).
The consultation is described as the ‘first step in a discussion of whether and how a CBDC could improve the safe and efficient domestic payments system’ and does not favour any policy outcome.
Some nations have already gone live with a CBDC – the Bahamas launched its ‘Sand Dollar’ in 2020 and Eastern Caribbean nations began to roll out blockchain-based digital currency ‘DCash’ nine months ago – while China is at an advanced stage of developing its CBDC, known as the e-CNY or ‘digital yuan’. But most major countries are yet to commit to launching state-backed digital money and are wrestling with similar questions to those posed by the Fed. Its chairman Jerome Powell has – like most central bank leaders – espoused a cautious approach on CBDC.
The paper, which carries a 20 May deadline for responses, is described as part of a ‘broad consultation that will also include targeted outreach and public forums’. It makes clear that the Fed does not intend to issue a CBDC without the backing of the executive branch and Congress, ‘ideally in the form of a specific authorising law’.
Fed’s CBDC questions – and research to date
A total of 22 questions are split into two chunks: 14 questions are under the title ‘CBDC Benefits, Risks and Policy Considerations’ and a further eight relate to ‘CBDC Design’. Included are questions related to areas such as user privacy, quantity limits and ‘offline’ capabilities (see Global Government Fintech’s boxout for all 22 questions).
The Fed states that its ‘initial analysis’ suggests that a potential US CBDC, if one were to be created, would ‘best serve the needs of the United States by being privacy-protected, intermediated, widely transferable and identity-verified.’
Powell told the Bank for International Settlements (BIS) Innovation Summit 2021 that “way more than half” of the Fed’s 12 regional banks had “active work” on CBDC. As an example, the Boston Fed has a multi-year partnership with the MIT (Massachusetts Institute of Technology) Digital Currency Initiative to build and test a hypothetical CBDC.
The newly released paper, in its appendix, summarises the Fed’s research and experimentation on digital currencies, saying this falls into four categories: technological experimentation; economic and policy research; stakeholder engagement and outreach; and international collaboration. Beyond the relatively high profile MIT example, it states that the Federal Reserve Bank of Atlanta is collaborating with Georgia State University and its Evidence-Based Cybersecurity Research Group on ‘using darknet data to reduce fraud’; as well as ‘advancing thinking on key issues related to security, programmable money, interoperability and standards, among other topics’.
The paper also states that the Federal Reserve Bank of Cleveland is ‘creating an academic collaboration that will examine how a CBDC could be designed to support financial inclusion’ and the Federal Reserve Bank of Atlanta is ‘considering whether cash-based and vulnerable populations could safely access and benefit from digital payments’.
The paper goes on to mention ‘Innovation Office Hours hosted by the Federal Reserve Banks’, which ‘help staff understand market developments and allow private-sector and academic stakeholders to better understand the types of questions the Federal Reserve is considering related to CBDC’. It adds that the Fed ‘will expand its public dialogue this year to ensure it solicits a wide range of views’.
Powell said last September that the Fed was aiming to “be in a position to make a well-informed decision on this [CBDC] within a couple of years”. This puts the US on a broadly similar CBDC development timeline to UK and Eurozone authorities.
22 QUESTIONS ON A POTENTIAL DIGITAL DOLLAR
‘CBDC Benefits, Risks and Policy Considerations’ (14 questions)
- What additional potential benefits, policy considerations or risks of a CBDC may exist that have not been raised in this paper?
- Could some or all of the potential benefits of a CBDC be better achieved in a different way?
- Could a CBDC affect financial inclusion? Would the net effect be positive or negative for inclusion?
- How might a US CBDC affect the Federal Reserve’s ability to effectively implement monetary policy in the pursuit of its maximum-employment and price-stability goals?
- How could a CBDC affect financial stability? Would the net effect be positive or negative for stability?
- Could a CBDC adversely affect the financial sector? How might a CBDC affect the financial sector differently from stablecoins or other nonbank money?
- What tools could be considered to mitigate any adverse impact of CBDC on the financial sector? Would some of these tools diminish the potential benefits of a CBDC?
- If cash usage declines, is it important to preserve the general public’s access to a form of central bank money that can be used widely for payments?
- How might domestic and cross-border digital payments evolve in the absence of a US CBDC?
- How should decisions by other large economy nations to issue CBDCs influence the decision whether the US should do so?
- Are there additional ways to manage potential risks associated with CBDC that were not raised in this paper?
- How could a CBDC provide privacy to consumers without providing complete anonymity and facilitating illicit financial activity?
- How could a CBDC be designed to foster operational and cyber resiliency? What operational or cyber risks might be unavoidable?
- Should a CBDC be legal tender?
‘CBDC Design’ (8 questions)
- Should a CBDC pay interest? If so, why and how? If not, why not?
- Should the amount of CBDC held by a single end-user be subject to quantity limits?
- What types of firms should serve as intermediaries for CBDC? What should be the role and regulatory structure for these intermediaries?
- Should a CBDC have “offline” capabilities? If so, how might that be achieved?
- Should a CBDC be designed to maximise ease of use and acceptance at the point of sale? If so, how?
- How could a CBDC be designed to achieve transferability across multiple payment platforms? Would new technology or technical standards be needed?
- How might future technological innovations affect design and policy choices related to CBDC?
- Are there additional design principles that should be considered? Are there trade-offs around any of the identified design principles, especially in trying to achieve the potential benefits of a CBDC?
Source: p25-p26 of the 40-page paper
=>>> Global Government Fintech’s dedicated ‘Digital Currencies’ section <==
‘G7 publishes CBDC public policy principles’ – our news story (19 Oct 2021) on 13 public policy principles for the implementation of retail CBDCs – including principles on ‘payments to and from the public sector’ and international development – published by the Group of Seven (G7) nations
‘D€: unanswered questions (and quirks) amid Europe’s CBDC ‘nitty-gritty’” – our analysis (20 Sep 2021) of eurozone central banks’ digital currency explorations to date as the European Central Bank prepared to launch the investigation phase into a potential digital euro
‘US project to kick off CBDC tests’ – our news story (5 May 2021) on a private-sector-backed research and advocacy collaboration known as the Digital Dollar Project (DDP) aiming to inform the design of a potential US central bank digital currency
‘Leading central bankers urge caution on rush towards CBDCs’ – our news story (23 March 2021) on a trio of the world’s most influential central bankers (including Jerome Powell) adopting a cautious tone during the opening session of last year’s BIS Innovation Summit