The funds in commercial bank accounts are digital and can be used to make digital payments to households and businesses, but commercial banks promise to redeem a dollar in one’s bank account into $1 of U.S. currency. In short, banks peg the exchange rate between commercial bank money and the U.S. dollar at one-to-one. Due to substantial regulatory and supervisory oversight and federal deposit insurance, households and firms reasonably view this fixed exchange rate as perfectly credible.
Crucial to whether “money” is successful is whether it is seen as a safe, stable and reliable instrument. What people care about is not the nuances of how money is recorded on a ledger somewhere, but whether the “money” in question can be safely and reliably used to make a purchase today, as well as in the future. Most people take for granted that cash maintains its full value, funds at a bank are secure, and businesses will honor store credit. Seen in this light, a CBDC could offer another form of safe and reliable money. Cross-border payments currently face a number of challenges, including slow settlement, high fees, and limited accessibility. The sources of these frictions include the mechanics of currency exchange, variations in different countries’ legal regimes and technological infrastructure, time-zone complications, and coordination problems among intermediaries, including correspondent banks and nonbank financial service providers.
A shift away from these other low-risk assets could reduce credit availability or raise credit costs for businesses and governments. After exploring many possible problems that a CBDC could solve, I am left with the conclusion that a CBDC remains a solution in search of a problem. Finally, could it be that new forms of private money, such as stablecoins, represent a threat to the Federal Reserve for conducting monetary policy? Many commentators have suggested that new private monies will diminish the impact of the Federal Reserve’s policy actions, since they will act as competing monetary systems. It is well established in international economics that any country that pegs its exchange rate to the U.S. dollar surrenders its domestic monetary policy to the United States and imports U.S. monetary policy. This same logic applies to any entity that pegs its exchange rate to the U.S. dollar.
For the purpose of this paper, a CBDC is defined as a digital liability of a central bank that is widely available to the general public. The paper has been designed to foster a broad and transparent public dialogue about CBDCs in general, and about the potential benefits and risks of a U.S. The paper is not intended to advance any specific policy outcome, nor is it intended to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a U.S. The different types of money carry different amounts of credit and liquidity risk. Central bank money carries neither credit nor liquidity risk, and is therefore considered the safest form of money.
The Federal Reserve, in particular, would need to tackle several key policy and implementation issues. For example, the safety and soundness of digital currency is of the utmost importance, given that the consequences of cyberattacks or operation failures could spread much faster and wider with a CBDC than with physical cash. Also, it would be a challenge in the CBDC design and operation to strike the right balance between fighting payment-related crime and protecting users’ privacy. In addition, the value added of introducing a digital currency to the domestic payments system needs to be evaluated carefully.
Former Fed chief and now Treasury Secretary Janet Yellen has, in the past, cast her doubts on cryptocurrencies, particularly bitcoin. The comment of the Fed chief comes just hours after the Treasury Department revealed its plans to have any cryptocurrency transfers of at least $10,000 be reported to the Internal Revenue Service. In this 2008 paper PDF, pseudonymous engineer Satoshi Nakomoto proposes Bitcoin, the first cryptocurrency.
In general, the government has sought to balance individuals’ right to privacy with the need to prevent illicit financial transactions, such as money laundering. For example, while the government does not receive all transaction data regarding accountholders at commercial banks, the Bank Secrecy Act requires that commercial banks report suspicious activity to the government. One way to implement CBDCs would be for citizens to have accounts directly with the central bank PDF. This would give governments powerful new ways of managing the economy—stimulus payments and other benefits could be credited to people directly, for example—and the central bank’s imprimatur would make CBDCs a safe digital asset to hold. But their introduction could also create new problems, experts say, by centralizing an enormous amount of power, data, and risk within a single bank and potentially compromising privacy and cybersecurity.
To make a central bank digital currency, or not to make one…this is the question. In just over a decade, cryptocurrencies have grown from digital novelties to trillion-dollar technologies with the potential to disrupt the global financial system. An increasing number of investors now hold bitcoin and hundreds of other cryptocurrencies as assets and use them to buy a swath of goods and services, such as software, digital real estate, and illegal drugs. See the most recent research and publications related to central bank digital currencies. Turning to the “supply” side of market readiness, the ecosystem structures, hardware infrastructure, and market participants must be ready to accept a CBDC.
