Fed lists risks and benefits of central bank digital currency

Creating an official digital version of the U.S. dollar could speed up payments and provide families with a secure option as payments technology evolves, but would also pose financial stability risks and privacy concerns, the Federal Reserve said in a statement. awaited discussion document released this Thursday (20).

The document made no policy recommendations and did not provide a clear signal on the Fed’s stance on the launch of a central bank digital currency (CBDC). Furthermore, the Fed said it would not proceed with creating a CBDC “without clear support from the Executive Branch and Congress, ideally in the form of a specific authorizing law.”

But the report sets the stage for the central bank to collect public assessments of the potential costs and benefits of the approach, which is increasingly being explored by the world’s major economies.

“While a CBDC can provide a secure digital payment option for households and businesses as the payment system continues to evolve and may result in faster payment options across countries, there can also be downsides,” Fed officials wrote in the report. .

Challenges include maintaining financial stability and ensuring that the digital dollar “complements existing means of payment,” the Fed said.

The central bank also needs to address important issues before embarking on a CBDC, such as ensuring it does not violate Americans’ privacy and that the government maintains its “ability to combat illicit financing.”

Even without making recommendations, the article clarified how a CBDC might work in practice. A key conclusion of the analysis was that a CBDC “would be better suited” to US needs if it were “brokered” by the current financial system, meaning that individuals would not have digital currency accounts directly with the Fed. Fed said they are not ruling anything out.

The document, announced by Fed Chair Jerome Powell last year, summarizes the payments landscape, including the emergence of stablecoins and other cryptocurrencies. Comments on the matter will be accepted for 120 days.

“The document is not intended to advance any specific policy outcomes, nor does it signal that the Federal Reserve will make imminent decisions on the appropriateness of issuing a US CBDC,” it says.

Powell made it clear that he would like such a bill to have broad support and, ideally, to be the product of Congressional action. The Fed’s board is generally divided on the need for a CBDC.

Unlike cryptocurrencies, which are typically managed by private actors and can experience wide price swings, a CBDC would be issued and backed by the central bank.

It also differs from e-money transactions that take place daily through large commercial banks in that it could give consumers a direct connection to the central bank, similar to that established by physical money.

The paper released on Thursday is separate from research in which the Boston Fed has been working with the Massachusetts Institute of Technology to explore the technological aspects of a CBDC. This technical research, including coding that could be used for a potential US CBDC, will be released as early as next month.

The Fed’s report comes at a time when about 90 countries, from the Bahamas to China, are exploring or launching their own central bank digital currencies, according to research by the Atlantic Council.