The Fed’s report on CBDCs
On January 20, the Federal Reserve released a long-anticipated research paper on the potential of a central bank digital currency (CBDC) in the US. The report highlights the benefits of convenience, innovation, speed, cost and accessibility that a CBDC could provide. But at the same time the report stresses concerns about how the technology will affect market infrastructure, monetary stability, criminal activity and cyber security. Although it is clear that the Fed has no immediate plans to issue a digital dollar, the research paper describes two approaches the central would take if it were to do so:
- The preferred approach: The Fed would supply a retail digital currency to the general public indirectly, using private-sector financial intermediaries, including but not limited to commercial banks, as its agents. Those private intermediaries would then be responsible for managing customers’ central bank digital currency (CBDC) holdings and payments. This is identical to the “synthetic” central bank digital currency (sCBDC) approach first recommended by Tobias Adrian back in 2019. According this approach, both bank and nonbank private-sector payment service providers can have accounts with the central bank and hold the central bank’ digital liabilities. Retail digital currency is supplied exclusively by these private-sector payment service providers, but is fully backed by central bank reserves that are ring-fenced from those providers’ other creditors.
- The second approach: is also a public-private digital currency arrangement, which it calls “intermediated” central bank digital currency. In this case, banks and nonbank payment service providers “would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments.” However, “the CBDC itself would be a liability of the Federal Reserve.” In other words, instead of being suppliers of their own retail digital currencies, the Fed’s private-sector partners would be acting as its agents, that is, as custodians and trustees of their clients’ holdings of its digital currency, much as several U.S. banks now hold private cryptocurrencies, including U.S. dollar stablecoins, in custody for their customers.
Money and Payments: The U.S. Dollar in the Age of Digital Transformation
By: Federal Reserve Board
Reactions
Although the Federal Reserve’s CBDC report makes clear that it would not consider issuing any sort of digital currency “without clear support from the executive branch and from Congress,” the report also suggests that the Fed’s proposed “intermediated” CBDC would not be prohibited by the present Federal Reserve Act, because while that Act “does not authorize direct Federal Reserve accounts for individuals,” under its proposed plan “the private sector would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments.” […] For these reasons, I very much hope the Fed will abandon its proposed “intermediated” CBDC solution in favor of a “synthetic” CBDC alternative; and I hope others will join me in urging it to do so.
George Selgin, Cato Institute
Speaking for myself, I’d be happy with either an sCBDC [synthetic CBDC] or an iCBDC [intermediated CBDC] (assuming they are properly designed). My main concern was over the prospect of a government agency operating a large retail business. Both sCBDC and iCBDC are intermediated products–we can let the private sector manage the day-to-day operations of processing payments.
David Andolfatto – Federal Reserve Bank of St. Louis
A global social planner would not experiment with the world reserve currency. It is better if others move ahead and then the US can learn from their experiences.
Markus Brunnermeier, Princeton University
It’s about time that the Fed made a public commitment to explore the potential of CBDCs. The payments system in the US needs to be improved, and other major central banks are well ahead of the US in investigating a CBDC’s potential.
Kevin Werbach, Wharton School
Some Thoughts on the Fed’s CBDC Report
By: David Andolfatto – Federal Reserve Bank of St. Louis
Missed it by That Much: Where the Fed’s Digital Currency Proposal Goes Wrong
By: George Selgin – Cato Institute
Experts divided over Fed’s ‘intermediated’ approach to CBDC
By: Central Banking
