In late January 2022, the Federal Reserve released “Money and Payments: The U.S. Dollar in the Age of Digital Transformation,” its much-anticipated discussion paper on central bank digital currencies (CBDCs). In the paper, the Federal Reserve provides a framework and summary of its initial analysis on the potential adoption of a U.S. CBDC and invites the public and other stakeholders to provide their views. The paper does not advance a specific policy outcome or signal any imminent action; rather, it marks an important first step in public debate and engagement on the issue of CBDCs.
The Federal Reserve is not the first to consider a CBDC. According to the Atlantic Council, 87 countries are actively exploring CBDCs (an increase from 35 countries as of May 2020). While those efforts seem to have informed the Federal Reserve’s thinking on CBDCs, they have not compelled the Federal Reserve to seek any first-mover advantage in launching a CBDC. As Federal Reserve chair Jerome Powell noted about CBDCs in October 2020, “[I]t’s more important to get it right than to be first.” The promise of a report and its delivery many months later suggest that the Federal Reserve is, as it has often indicated in public statements, “carefully and thoughtfully” considering the implications of a U.S. CBDC.
The paper first explores existing forms of money in the United States, the current state of the U.S. payment system, and various digital assets that have emerged in recent years, including bitcoin and stablecoins. The focus then shifts to CBDCs, including their uses and functions, their potential benefits and risks, and related policy considerations.
But what is a CBDC? The Federal Reserve describes a CBDC as “a digital liability of a central bank that is widely available to the general public,” a new kind of central bank money analogous to a digital form of cash but different from digital money held as balances at commercial banks or nonbank financial services providers. In the Federal Reserve’s view, central bank money carries no credit or liquidity risk. As such, central bank money tends to underpin interbank payments and support the broader payment systems. Implementing a CBDC could build on recent and pending improvements to traditional payment systems while reducing risks, vulnerabilities, and limitations that the paper associates with payment stablecoins and other digital assets with money-like characteristics that provide a foundation for peer-to-peer payments.
The paper notes that, in addition to the potential benefits of expanding and improving payment systems, a U.S. CBDC also could support and preserve the dominant international role of the U.S. dollar, promote financial inclusion, and extend and expand consumer access to safe payment options.
CBDCs are not without potential risks. The paper describes the following risks, among others:
- A widely available CBDC could serve as a close or near-perfect substitute for commercial bank money, which could reduce deposits in the banking system, increase bank funding expenses, and reduce credit availability or raise credit costs for consumers and businesses.
- As central bank money, a CBDC could be attractive to risk-averse users, particularly in times of systemic stress. The ability to quickly convert other forms of money into CBDCs could make runs on financial institutions more likely or more severe.
The Federal Reserve notes that CBDC design choices (e.g., programmability, including limiting the amount of CBDC that an individual could hold at any given time or could accumulate over any given period) could mitigate some of these risks.
- Introducing a CBDC could affect the implementation of monetary policy and interest-rate control by altering the supply of reserves in the banking system. To maintain ample reserves the Federal Reserve might need to substantially expand its balance sheet.
With these potential benefits and risks in mind, the Federal Reserve identifies four key characteristics for any U.S. CBDC:
- Privacy-protected: Cash (physical currency) is currently the only central bank money available to the general public. It remains a popular and largely anonymous and private form of payment. The Federal Reserve stresses that a CBDC should complement, rather than replace, cash and that any CBDC would need to appropriately balance the privacy rights of consumers and the transparency needed to deter criminal activity.
- Intermediated: The Federal Reserve acknowledges that it lacks statutory authority to offer direct accounts to individuals and that such accounts would significantly expand the Federal Reserve’s role in the financial system. (Already, legislation has been introduced that would expressly prohibit the Federal Reserve from issuing a CBDC to individuals.) As such, the Federal Reserve contemplates that private-sector intermediaries (like commercial banks and regulated nonbank financial service providers) would offer accounts or digital wallets to facilitate CBDC holdings and payments, drawing on those intermediaries’ existing privacy and identity-management systems.
- Transferable: To serve as a widely accessible means of payment, any CBDC would need to be able to move freely between different intermediaries.
- Identity-verified: The Federal Reserve asserts that any CBDC would need to be designed to comply with existing rules designed to combat money laundering and the financing of terrorism. As such, any intermediary would need to verify the identity of a person accessing the CBDC.
The paper ends by seeking comments from the public and other stakeholders, including answers to a series of questions about CBDC benefits, risks, policy considerations, and design. Public comments and questions can be submitted at https://www.federalreserve.gov/apps/forms/cbdc until May 20, 2022. The Federal Reserve also will conduct targeted outreach and convene public forums to encourage further dialogue about CBDCs.
 Notably, the paper includes an appendix that describes the work the Federal Reserve is already undertaking to research digital currencies, including technological experimentation, economic and policy research, engaging with stakeholders, and international outreach. On February 3, 2022, the Federal Reserve Bank of Boston and the Digital Currency Initiative at the Massachusetts Institute of Technology released the findings of their initial technological research into a CBDC.