In all this excitement, there are also calls for the Federal Reserve to “get in the game” and issue a central bank digital currency (CBDC) that the general public could use. 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.
“The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors,” it added. Earlier this month, France, Switzerland, and Singapore jointly conducted a trial for their digital currencies, one of the first of its kind. OpenCBDC is a core processing engine for money that focuses on security, performance, scalability, and flexibility. It provides a codebase that supports 1.84 million transactions per second and settlement – meaning the transaction is completed – of under one second. The Boston Fed’s work on CBDC with MIT’s Digital Currency Initiative is known as Project Hamilton.
The Federal Reserve and other agencies are simply evaluating the feasibility of a central bank digital currency through Biden’s executive order. A central bank digital currency is “virtual money backed and issued by a central bank,” according to the Atlantic Council, a think tank focusing on economic and political changes. The order also pointed to the need for technical experts with good money and payment systems knowledge to oversee the technology involved in building the U.S.
Under this structure, commercial banks act as an intermediary between the Federal Reserve and the general public. 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. Consequently, they treat commercial bank money and central bank money as perfect substitutes—they are interchangeable as a means of payment. The credibility of this fixed exchange rate between commercial and central bank money is what allows our payment system to be stable and efficient.
Similarly, if you have a development team or a product and are looking to access the U.S. digital asset markets lawfully, we are standing by to help. Designating cryptocurrency as a national currency remains a complex and controversial issue. While the U.S. has not yet taken this step, Trump’s executive order represents the most significant policy shift in U.S. crypto history. As more nations explore crypto adoption, the U.S. must decide whether to lead or risk falling behind in the rapidly evolving digital financial landscape.
The ability to quickly convert other forms of money—including deposits at commercial banks—into CBDC could make runs on financial firms more likely or more severe. Traditional measures such as prudential supervision, government deposit insurance, and access to central bank liquidity may be insufficient to stave off large outflows of commercial bank deposits into CBDC in the event of financial panic. Interbank payment systems may initially settle in commercial bank money, or in central bank money, depending on their design.
A non-interest-bearing CBDC, for example, would be less attractive as a substitute for commercial bank money. In addition, a central bank might limit the amount of CBDC an end user could hold. Another potential benefit of a U.S.-issued CBDC could be to preserve the dominant international role of the U.S. dollar. The dollar is the world’s most widely used currency for payments and investments; it also serves as the world’s reserve currency.
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. Before getting into the details, let me start by clarifying what I mean by “CBDC.” Put simply, a CBDC is a liability of the central bank that can be used as a digital payment instrument. For purposes of this speech, I will focus on general purpose CBDCs—that is, CBDCs that could be used by the general public, not just by banks or other specific types of institutions. A general purpose CBDC could potentially take many forms, some of which could act as anonymous cash-like payment instruments. The payment system is changing in profound ways as individuals demand faster payments, central banks including the Fed respond, and nonbank entities seek a greater role in facilitating payments.
Central bank money carries neither credit nor liquidity risk, and is therefore considered the safest form of money. This paper begins with a discussion of existing forms of money; the current state of the U.S. payment system and its relative strengths and challenges; and the various digital assets that have emerged in recent years, including stablecoins and other cryptocurrencies. The paper then turns to CBDC, focusing on its uses and functions; potential benefits and risks; and related policy considerations. CBDC, the public could use another form of central bank money other than physical cash and digital balances held in individual or corporate bank accounts.
The public often expects that nonbank money will maintain a stable value and remain readily convertible into both physical currency and bank deposits, but that is not always the case because the assets supporting nonbank money are not risk-free. For example, a decline in the value of a security that backs nonbank money may imperil the nonbank money’s conversion into commercial bank money quickly and at a fixed rate. Concern that nonbank money will not remain convertible quickly at full one-for-one value may fuel runs on this money. That is, having lost confidence, holders will try to convert out of their nonbank money more quickly and in greater amounts. This puts more pressure on sales of supporting securities or other assets, causing worse losses.
