Central Bank Digital Currencies: Policy Issues

"The recent proliferation of private digital currencies or cryptocurrencies, such as Bitcoin, has led to questions of whether the Federal Reserve (Fed) should create a central bank digital currency (CBDC)—a digital dollar that would share some of the features of these private digital currencies.

In addition, several countries are moving forward with plans to create CBDCs, and this has increased calls for the Fed to act. According to a survey from the Bank for International Settlements, more than 85% of central banks worldwide are researching, piloting, or in advanced stages of development of CBDCs. For example, China has completed several digital currency trials in major cities across the country, as well as cross-border trials with Hong Kong; the European Central Bank hopes to launch a digital euro by 2025; the Eastern Caribbean is piloting its digital currency (DCash) in four countries; and the Bank of Japan has announced a “phase one” of testing a digital yen. The proliferation of CBDCs around the world has raised questions about whether the United States is falling behind in the future of the financial system, and whether that could affect its “reserve currency” status.

Digital payments and account access are already widespread in the United States. A key question from an end user (e.g., consumer or merchant) perspective is: would a CBDC be faster and less expensive than the current system? A CBDC would presumably allow for real-time settlement of payments—a feature that is not currently ubiquitous in the U.S. payments system, but may become so after the Fed rolls out FedNow, its planned real-time settlement system. Creating a CBDC could take several years, whereas FedNow is expected to be operational in 2023. Whether payments using a CBDC would be less expensive than the status quo remains unknowable until detailed proposals have been made. (Cross-border payments have been identified as offering greater potential gains in cost and speed.)

From an end-user perspective, CBDC proposals range from a system similar to the current status quo to one that is fundamentally different. The Fed and private sector already operate bank-to-bank digital wholesale payments systems, some of which are settled in real time, so a CBDC only accessible to banks may differ slightly from the current system. In contrast, proposals for consumers to be able to hold CBDCs in accounts at the Fed would fundamentally change the role of the Fed and its relationship with consumers and banks. Thus, depending on its attributes, a domestic CBDC could potentially compete with private digital currencies, foreign CBDCs, private payment platforms, or banks. CBDC proponents differ as to which of these they would like a domestic CBDC to compete with. CBDCs are more likely to compete with private digital currencies as a payment means for legal commerce than to function in their other current uses (e.g., as speculative investments or as payment means for illicit activities).

Depending on its features and how much it differed from the status quo, a U.S. CBDC would have an ambiguous but potentially significant effect on financial inclusion, financial stability, cybersecurity, Federal Reserve independence, seigniorage, and the effectiveness of monetary policy. If the CBDC mainly crowded out cash and cryptocurrency use, it could make illicit activity more difficult, possibly at some expense of individual privacy. If used to deliver government payments, the CBDCs’ ability to improve their speed and efficiency would depend on the extent of its adoption by those not already receiving payments by direct deposit, which might be low unless mandatory.."
Central bank digital currencies