According to the paper, “The Federal Reserve will only pursue a CBDC within the context of broad public support and cross-governmental support.”
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After publishing a paper discussing the pros and cons associated with a possible central bank digital currency, the U.S. Federal Reserve invites comments from the public.
A publication titled “Money & Payments: The U.S. dollar in the Age of Digital Transformation” was released by the Fed . It stated that it is unlikely to be authorized to issue digital wallets, accounts capable of holding U.S. central banks digital currencies, or CBDCs, and instead leave these matters to the private sector. The government body also stated that it will be looking into privacy concerns to determine whether CBDCs could be easily transferred between customers of different intermediaries and identity verification to combat money laundering.
The paper stated that the U.S. could create a CBDC to reduce the risk of “proliferation” of private digital money. It would also encourage innovation in the private sector. This would level the playing field between small and large firms, for which some of the costs associated with issuing their own digital currency might be prohibitive. A digital dollar could bring benefits such as cross-border payments, efficiency and speed of digital payments and financial inclusion.
According to the Fed paper, “A CBDC could fundamentally alter the structure of U.S. financial systems, altering roles and responsibilities for the private sector as well as the central bank.” Some have suggested that if the new CBDCs are more appealing than the existing U.S. dollars, the global dollar use could decline. A U.S. CBDC could help to preserve the dollar’s international role.
Regarding the risks in introducing a digital dollar to the U.S. and world economies, the Fed said that a CBDC could effectively replace commercial bank money, raising prices for retail customers and driving interest away from investments in “mutual funds, Treasury bills, and other short-term instruments.” The paper also repeated some of the concerns previously raised by officials on the stability of the current financial system, such as how the Fed might need to increase its reserves based on demand for a digital currency, and striking t balance between user privacy and transparency needed to prevent fraud.
To that end, the Fed is opening up comments to the public for 120 days — until May 20 — asking concerned citizens to address 22 questions related to the possible rollout of a digital dollar’s benefits, risks, design and policy considerations:
“The Federal Reserve will only take further steps toward developing a CBDC if research points to benefits for households, businesses, and the economy overall that exceed the downside risks, and indicates that CBDC is superior to alternative methods. Furthermore, the Federal Reserve would only pursue a CBDC in the context of broad public and cross-governmental support.”
First announced by Fed chair Jerome Powell in May 2021 to be released last summer, the publication of the CBDC discussion paper has been delayed several times. On Jan. 11 during his testimony to members of the Senate Banking Committee, Powell said that the paper would be coming in a matter of weeks following delays due to “changes in monetary policy.”
Though a notice from the Fed stated the discussion paper “does not favor any policy outcome,” Powell has previously suggested there was no rush in the U.S. releasing a digital dollar despite other countries, including China, moving ahead with trials in different cities. Athletes are expected to travel to China for the 2022 Winter Olympics in a few weeks when competitors and visitors will have the opportunity to use the country’s digital yuan.
