The Federal Reserve announced Jan. 20 that it will not issue a central bank digital currency “without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.”
The highly-anticipated report, intended to be an initial step in a public discussion on the feasibility of implementing a central bank digital currency, comes as the Federal Reserve undertakes hypothetical experiments and reaches out to key stakeholders. As reported by The Wall Street Journal, Fed officials have been divided on the matter, making it unlikely that they will decide soon on whether to create a digital dollar.
The Federal Reserve, which did not take a firm stance on adopting CBDC, indicated that consumer accounts would not be created at the Fed and that CBDC would be intermediated, meaning they would be managed by private sector firms, including banks. Commercial banks and regulated nonbank financial service providers would operate in an open market to offer accounts or digital wallets to initiate the management of CBDC holdings and real-time payments.
The 40-page report listed a number of possible benefits from a CBDC, including that it provides “households and businesses a convenient, electronic form of central bank money, with the safety and liquidity that would entail; would 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.” The Fed noted that a CBDC “would not require mechanisms like deposit insurance to maintain public confidence, nor would a CBDC depend on backing by an underlying asset pool to maintain its value. A CBDC would be the safest digital asset available to the general public, with no associated credit or liquidity risk.”
The discussion comes as 87 countries — representing more than 90 percent of global GDP — explore a central bank digital currency. Nine countries have already fully launched a digital currency. Also, consumers are already flocking to digital currencies: In 2021, the market capitalization of all cryptocurrencies reached a record $2 trillion, and there are almost 10,000 different cryptocurrencies. The Fed believes the central currency could preserve the dominant international role of the U.S. dollar in the face of this market disruption.
The Fed noted there are also possible downsides to having a central banking digital currency. One concern is that if it proves to be a substitute for commercial bank money, the aggregate amount of deposits in the banking system could be reduced, which could increase bank funding expenses, reduce credit availability, or hike costs for households and businesses. Also, easily allowing consumers to convert commercial bank deposits into a CBDC could cause a run on commercial banks during times of stress to the financial system. To combat these risks, the Fed could adopt a non-interest-bearing CBDC to provide a less attractive substitute for holding money in commercial banks, or limit the amount of CBDC an end user could hold or accumulate over short periods.
Legislative reaction to the report was mixed. U.S. Senate Banking Committee Ranking Member Pat Toomey, (R-Pa.,), applauded the report’s acknowledgement of “the need for clear support from Congress prior to the issuance of a CBDC,” and for finding “that the Fed offering retail accounts is not only a terrible idea, but also impermissible by law.” Still, he expressed concern that the report did not “clearly explain” how a CBDC would safeguard consumer transaction data and for implying that the central currency would not allow direct, peer-to-peer transactions.
Democratic U.S. Sen. Sherrod Brown, (D-Ohio), chair of the U.S. Senate Committee on Banking, Housing and Urban Affairs, called the report “a good first step toward designing a central bank digital currency that will bring more Americans into our banking system and help maintain the United States’ leadership in the global economy.”