The Federal Reserve’s long-promised report on Central Bank Digital Currencies (CBDCs) finally arrived last week- and it could serve as a Rorschach test separating the supporters from the skeptics.
In a no-frills 30-page report repeatedly characterized as a “first step,” the Fed puts to rest a few lingering CBDC structural concerns while establishing a solid framework for ongoing dialogue. Naysayers could rightly counter that precious little in the document couldn’t have been said 4-6 months ago- in which case the dialogue would already be further along.
Regardless of your view, here are some key takeaways from the Fed’s report.
Although the Fed clearly states it has made no decision on whether to proceed with creating a CBDC, it indicates that such a payment instrument would best serve US needs if it had the following characteristics:
- Intermediated
- Privacy protected
- Identity verified
- Widely transferable
The first seems designed to bat away a bizarre concern that recently hit the walls of Congress. A pending House bill would amend the Federal Reserve Act to prohibit the Fed from issuing CBDCs directly to individuals- essentially cutting commercial banks out of the equation if consumers banked directly with the government. Without mentioning this bill, the report calmly points out that the Fed already lacks the authority to establish individual accounts, then goes on to enumerate the many advantages of working through the existing financial system.
Another commonly voiced objection has been that a CBDC would afford the government greater visibility into consumers’ financial dealings. The Fed plainly states that “protecting consumer privacy is critical,” but must be balanced against the “transparency necessary to deter criminal activity.” This is presumably a nod to Know Your Customer requirements, and the Fed touts existing private sector tools that could be deployed in this regard.
The transferability condition seems like motherhood and apple pie, echoing the seamless and ubiquitous nature of any effective payments system.
In a final effort to dispel misgivings, the Fed says it “does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law,” and also that any CBDC would “complement rather than replace” existing forms of currency.
In their closest approach to provocative statements, the Fed acknowledges that the issuance of a CBDC would be something of a defensive maneuver to protect the US dollar’s role on the international stage. It also points to the significant potential to reduce the cost of cross-border transactions- a frequently cited digital currency use case. It quotes a World Bank report indicating that the average cost of a remittance from the US to another country is 5.4% of its value- which of course is booked as revenue by certain private sector firms.
The Fed’s report concludes with a 22-question Request for Information, which will represent the next step in the ongoing dialogue based on this newly issued, if very lightly defined, CBDC framework. All such comments will be available to the public, and should make for fascinating reading.
Do I wish we were further along in the CBDC journey? Sure. But given that we’re talking about a quasi-governmental agency wrestling with a politically charged topic, I think we should be relatively pleased with the progress.