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The U.S. Federal Reserve has published a long-awaited discussion paper on the policy questions related to the issuance of a digital dollar.
The paper, which was published on January 20, examines the pros and cons of a potential U.S. central bank digital currency (CBDC), without deciding in favor of any specific policy outcome.
It represents “the first step in a discussion of whether and how a CBDC could improve the safe and effective domestic payments system,” the Fed says.
The regulator is now seeking public views on 20 questions related to the benefits, risks, and policy considerations of a digital dollar, as well as on design matters.
"We look forward to engaging with the public, elected representatives, and a broad range of stakeholders as we examine the positives and negatives of a central bank digital currency in the United States," Federal Reserve chair Jerome Powell said.
Let’s talk!
The paper, which was originally due to be published last summer, opens up a long-awaited conversation on a potential CBDC. In this sense, the U.S. is a little late to the party as it joins the growing club of countries that are exploring the possibility of a digital currency.
Although the Fed seems to stick to Powell’s previous maxim that “it is more important to get it right than to be the first,” there is arguably pressure coming from the other side of the globe.
As China, the world’s second-largest economy, has been moving swiftly ahead with its plans for a full launch of a digital yuan in 2022, many have voiced their concerns that a Chinese CBDC has the potential to challenge the dollar’s position as the world’s reserve currency.
The Fed’s paper is the first step in the U.S. journey towards a potential digital dollar that could fortify this role, which has been welcomed across Congress.
The dollar’s role as the world’s reserve currency “is under threat by emerging powers like China that are creating their own CBDCs. The Federal Reserve has an important role to play in maintaining the U.S. dollar as the world's reserve currency, and policymakers and regulators must make sure that neither foreign governments’ digital currencies nor digital assets issued by private entities weaken the U.S. dollar’s stature or harm our economy,” Maxine Waters (D-CA), chairwoman of the House Financial Services Committee, said.
“I’m glad the Fed has constructively contributed to the necessary ongoing public discussion regarding the issuance of a CBDC,” said Senate Banking Committee ranking member Pat Toomey (R-PA).
No digital dollar without Congress
One of the key messages of the report is that the Fed will not go ahead with the issuance of a CBDC without Congress.
Although the legal authority to issue a CBDC is under question in many countries, Powell has previously expressed the view that the Fed needs Congressional approval before issuing a digital dollar.
The paper now explicitly states that the Fed “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.”
“I am pleased the report reaffirms the Fed will not move forward on a CBDC without express authority from Congress,” House Financial Services Committee ranking member Patrick McHenry (R-NC) said.
No decision yet, but…
Although the Fed underscores that it has not made any decisions on whether to pursue a CBDC, the paper suggests that a potential digital dollar “would best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified.”
The Fed stresses, however, that the paper "is not intended to advance a specific policy outcome and takes no position on the ultimate desirability of a U.S. CBDC."
When discussing potential uses and functions of the CBDC, the Fed says the digital money could be used to make basic purchases or pay bills, collect taxes or make benefit payments directly to citizens. It also mentions the programmability of digital fiat as a function that could allow, for example, the delivery of payments at certain times.
As potential benefits, the Fed says the digital dollar could provide users with a convenient, electronic form of money, with central bank safety and liquidity. It could also facilitate innovation, support faster and cheaper payments, including cross-border payments, and increase financial inclusion.
On the other hand, the Fed notes that a CBDC could pose certain risks that raise a variety of important policy questions.
For instance, a CBDC might affect the financial-sector market structure, the cost and availability of credit, the safety and stability of the financial system, and the efficacy of monetary policy.
The report also stresses it is important to strike the right balance between safeguarding consumer privacy rights and protecting against criminal activity.
As financial institutions are subject to robust anti-money laundering (AML) rules, the U.S. should make sure a CBDC is designed in a way that similarly allows CBDC intermediaries to comply with these rules.
In practice, this would mean that a CBDC intermediary would need to verify the identity of a person accessing CBDC, just as banks and other financial institutions currently verify the identities of their customers.
Complement, rather than replace
The paper stresses that the Fed is guided by six key principles in its work related to the CBDC.
These principles include that the digital dollar should complement, rather than replace, current forms of money and methods for providing financial services.
The principles also lay down that a U.S. CBDC should provide benefits to the public that outweigh any costs and risks, yield such benefits more effectively than alternative methods, protect consumer privacy, protect against criminal activity, and have broad support from key stakeholders.
Stakeholders across the country have welcomed the paper.
“We welcome the discussion paper from the Fed and are pleased that it was guided by principles that are consistent with ETA’s own, including whether a CBDC would improve upon the existing robust, fast, and secure payments system,” said Jodie Kelley, CEO of the Electronic Transactions Association (ETA). “We look forward to continuing to work with policymakers on the possible creation of a CBDC.”
The Merchants Payments Coalition (MPC) said the CBDC could help address the issues around steep credit and debit card swipe fees that cost consumers tens of billions of dollars each year.
“A safe, reliable digital currency is one of the innovations merchants have long believed could ease the card industry’s growing dominance of the consumer economy,” MPC executive committee member Leon Buck said.
Meanwhile, the American Bankers Association warned that “a U.S. CBDC could fundamentally reshape our banking and payments system …, and these implications require a careful weighing of the real-world costs and benefits before any decision to move forward.”
