On January 20, 2022 the Federal Reserve released a discussion paper that examined both the pros and cons of a potential U.S. Central Bank Digital Currency (CBDC). The Federal Reserve invited comments from the public, in particular regarding whether and how a CBDC could improve America’s safe and effective domestic payments system.

For the purpose of the paper, the Federal Reserve defined a CBDC as a digital liability of a central bank that is widely available to the general public. In this respect, it is analogous to a digital form of paper money.

The American public has long held and transferred money in digital forms, including bank accounts, online transactions, or payment apps (i.e., Venmo and Paypal). The forms of money used in those transactions are liabilities of private entities, such as commercial banks. Conversely, a CBDC would be a liability of a central bank, like the Federal Reserve.

Technological innovation has recently ushered in a wave of digital assets with money-like characteristics, including cryptocurrencies based on the combination of cryptographic and distributed ledger technologies, which together provide a foundation for decentralized, peer-to-peer payments. While cryptocurrencies have been widely invested in as a commodity equivalent, none have been widely adopted as a means of payment. As headlines in the financial section of the paper would attest, they remain subject to significant price volatility and require a service provider platform to purchase, sell, and transfer. Moreover, as highlighted in the Federal Reserve’s paper, cryptocurrencies also come with a significant energy footprint and make consumers vulnerable to loss, theft, and fraud.

Stablecoins are a more recent incarnation of cryptocurrency that peg their value to one or more assets, such as a sovereign currency or commodity. Stablecoins pegged to the U.S. dollar are predominantly used today to facilitate the trading of other digital assets, and many firms are exploring ways to promote stablecoins as a widespread means of payment. In effect, a CBDC would be a stablecoin issued by the Federal Reserve.

Turning to history, the U.S. had private banks issue banknotes for more than a century, and public money versus private money was an oft-debated topic. Eventually, with the creation of the Federal Reserve, private money all but disappeared from circulation. In effect, a proposed CBDC would be the 21st century equivalent to public money replacing private money.

The upside of a functioning CBDC would be a safe, digital payment option for households and businesses with less friction in the form of delays and fees. Check holds could disappear, and the various fees and time lag between the swipe of a credit or debit card and the cash being credited to the merchant’s account would also be reduced, if not eliminated.

The downside of a CBDC would include challenges in preserving the Federal Reserve’s dual goals of monetary policy and preserving price stability. In addition, widespread use of a CBDC would be another payment form for consumers to choose and merchants to monitor in addition to cash, credit/debit, and checks. Consumers may also balk at the thought of the government’s computers being able to monitor all of their transactions and know the amount of CBDC cash earned and spent.

The full 40-page paper is available for download here:

Money and Payments: The U.S. Dollar in the Age of Digital Transformation (federalreserve.gov)

Readers can submit comments through March 1, 2022 at no cost via the following link:

Federal Reserve Board – Central Bank Digital Currency (CBDC) Feedback Form