This announcement was released by the Federal Reserve yesterday. There have been numerous articles, blogs and other types of posted materials during the past year on the subject of CBDCs, including progress being made in multiple global markets, along with commentary made by various Fed governors around CBDC potential benefits and risks. During this time, and especially over the past several months, there has been an anticipation (at least from here) that the Fed would release findings from the ongoing project efforts by the Boston Fed and MIT around CBDCs in some interim form, and maybe give a sense of what they are planning to do with a timeline. The Fed instead chose to release a ‘discussion’ paper that summarizes the landscape around CBDCs and solicit public commentary.
‘The Federal Reserve Board on Thursday released a discussion paper that examines the pros and cons of a potential U.S. central bank digital currency, or CBDC. It invites comment from the public and is the first step in a discussion of whether and how a CBDC could improve the safe and effective domestic payments system. The paper does not favor any policy outcome…
“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 H. Powell said…
The paper summarizes the current state of the domestic payments system and discusses the different types of digital payment methods and assets that have emerged in recent years, including stablecoins and other cryptocurrencies. It concludes by examining the potential benefits and risks of a CBDC, and identifies specific policy considerations.’
If one were to perhaps peek into the crystal ball, one would likely conclude that there will be some sort of retail CBDC and the Fed will determine the issuance model sometime over the next year. Although a bit anticlimactic versus what we were expecting, the paper is worth a read, especially for those that have not been closely following CBDC developments, since it provides a good overview of currency and the relationship between the public, central banks, and commercial banking entities.
By evaluating CBDCs primarily for the impact they might have on the Fed’s own operations and regulatory mandates, the paper appears to come out long on cons and short on pros. The full paper, Money and Payments: The U.S. Dollar in the Age of Digital Transformation (PDF), is available for review and public comment. It is a short read at just 35 pages of content, but on balance, doesn’t appear to offer many positive reasons for deploying CBDCs. The quote below is from the report itself:
“A CBDC could potentially offer a range of benefits. For example, it could provide households and businesses a convenient, electronic form of central bank money, with the safety and liquidity that would entail; give entrepreneurs a platform on which to create new financial products and services; support faster and cheaper payments (including cross-border payments); and expand consumer access to the financial system. A CBDC could also pose certain risks and would raise a variety of important policy questions, including how it might affect 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 introduction of a CBDC would represent a highly significant innovation in American money. Accordingly, broad consultation with the general public and key stakeholders is essential. This paper is the first step in such a conversation. It describes the economic context for a CBDC, key policy considerations, and the potential risks and benefits of a U.S. CBDC. It also solicits feedback from all interested parties.”
Overview Written in Collaboration by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group, and Tim Sloane, VP, Payments Innovation at Mercator Advisory Group